Concept of Valuation

5. Pricing a Bond between two coupon payment dates Dirty Price Actual Amount paid by Buyer to Seller. Invoice Price Price with Accrued Interest. [Cum Interest Price] Clean Price It is the quoted price or Flat Price Price Without Accrued Interest [Ex Interest Price] Last Coupon Payment Date Date of transaction Dirty Price = Clean Price + Accrued Interest till DOT Next coupon Payment Date

When an investor purchases a bond between two coupon payment dates than we need to compensate the seller for the Accrued Interest from Last coupon date till Investment Date. Concept Point : Pricing of Bond between two Coupon dates. Step 1: Value the bond on the Next coupon date (after the date of purchase) using the discount rate given on Date of Purchase. Step 2: Now Add Step 1 value with coupon amount received on the next coupon date (after date of purchase) Step 3: Now calculate PV of Step II value using Discount Rate on Date of valuation. This is Dirty Price. Step 4: Clean Price = Dirty Price – Accrued Interest (last coupon date till date of purchase)