Pricing

What is the difference between clean and dirty price?

Bond prices are always in percentages, but we tend to drop the percentage sign in a quote. So, 98.50 is effectively 98.50%. Furthermore, Eurobonds are always quoted “clean” of accrued interest. When we add accrued interest to the price, we get the “dirty price”.

What is the difference between a discounted price and a premium price?

A bond trading in the secondary market at a price higher than 100% is said to trade at a premium. Below 100%, we call it a discounted price. If the bond is at exactly 100%, we say it is trading at par. Bonds in high demand usually trade at a premium.

At issuance (primary market) the issuer can decide to launch the bond at par, at a premium or at a discount. A bond issued at a premium will fetch the issuer more proceeds. In contrast, a bond issued at a discounted cash price usually comes with a slightly lower coupon rate. After issuance (secondary market) it is up to market forces to determine whether a bond will trade above or below 100%.

The issue prices for Nigeria’s Eurobonds that are currently in the market (i.e. outstanding) are presented below.

*Re-offer price. A re-offer price differs slightly from an issue price. When a Eurobond is issued the banks that help the issuer (“bookrunners/underwriters”) may take the entire issuance on their books first before onward selling to the market participants who subscribed for the issuance. The price they sell the issuance at is called the re-offer price.

Does an investor lose money when a premium price is paid to acquire a bond?

Although most bonds get redeemed at 100%, a bond purchased at a premium will “eat away” some of the investor’s (coupon) income over the life of the bond. For this reason, the yield of a bond trading at a premium will be lower than its coupon rate.

Losing money only happens when the holder sells the bond prior to its maturity date at a lower price than its purchase price or when the bond has a negative yield.