Pricing

What is the difference between clean and dirty price?

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

Clean Price90Quoted price excluding accrued interest
Accrued interest3.071181Accrued Interest / Nominal Amount x 100%
Dirty Price93.071181Clean Price + Accrued interest

The dirty price quotation includes the accrued interest component and is sometimes referred to as “cumulative-coupon” or “cum-coupon”. A bond that has stopped paying the coupon (due to default for example) is said to be “flat trading”. If not implicitly stated, all bonds trade cum-coupon.

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, the issuer sets the issue price either at par, at a premium or at a discount. A bond issued at a premium will fetch the issuer more proceeds, however, usually will have a higher coupon rate than a bond issued at a discounted cash price. After issuance, it is up to market forces in the secondary market to determine whether a bond will trade above or below 100%.

What is a re-offer price?

A re-offer price differs slightly from a bond issue price. The banks helping the issuer to launch the bond, may decide to take (part of) the issuance on their books first before onward selling to other market participants. This process is generally referred to as “underwriting” and historically has helped issuers making a success of their issuance. The eventual price the bond issuance will be offered to  investors for 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.

A bond purchased at a premium price does not mean the investor will lose when holding the bond until maturity when the principal is paid back at par. 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.