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Assume we have all available information and contract specifications for a fixed income instrument, except if the price is quoted as a dirty or clean price. How can we determine if the price given is a dirty price or clean price?

pyCthon
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2 Answers2

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It is extremely rare for a bond to be quoted on a dirty-price basis. Off the topic of my head, I can only think of Chilean & Korean bonds...

If you have yield, you can calculate the price from yield and see whether they match. If you have the history of prices, try calculating mod duration and see whether the time series jumps every few months.

Helin
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    Shouldn't there be a "seasonality" in the bond price too? I mean if coupon is paid semi-annually, there would be an abrupt change in price every 6 months as and when the coupons are paid? – nimbus3000 Feb 16 '17 at 11:14
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    @nimbus3000 Bond prices are adjusted daily to reflect interest accrual. You won't see "seasonality" or "jumps" in a chart as the answer suggests. For example, if you bought a bond today that has a quarterly coupon due April 1, you will receive the whole coupon, however, the price that you pay today will reflect 46 days of interest that has accrued thus far this quarter. – amdopt Feb 16 '17 at 18:31
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    @nimbus3000 It's surprisingly difficult to detect. On the coupon payment date, dirty price drops, sure. But what if on that day, yield goes down, which pushes up price and cancels out the price drop. That's why when you plot prices, it's hard to figure out which changes are "artificial," which ones were due to mkt changes. By contrast, plotting metrics like mod duration is very reliable. – Helin Feb 16 '17 at 19:10
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    Another situation in which you run into a lot of "dirty" quotes is distressed debt. If the upcoming coupon is at high risk of never materializing, it isn't necessarily sensible to include its accrual and the market knows that. – Brian B Feb 17 '17 at 13:30
  • This is a great recommendation, I agree it is rare but fairly problematic for a global book with daily risk management. I want to be able to determine this on an on-going basis. I'll see if I can modify your suggestion a bit. – pyCthon Feb 17 '17 at 21:57
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Dirty Price = Clean Price + Accrued Interest

When bond prices are quoted on a Bloomberg Terminal or Reuters they are quoted using the clean price. The clean price is mostly quoted in the US bond markets. The dirty price is mostly quoted in the European bond markets.

Now, if you want to find out whether a price is clean or dirty, you can take that price as an input and find out the corresponding yield from BBG YA (or YAS) page. If the yield matches, then it's a clean price. If not, then try deducting the Accrued Interest (available on YAS page) from your price and then do the same P2Y check, if it matches then it's the dirty price.

user219626
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