Bond YTM - clean or dirty price for PV
I notice that most brokers in Bulgaria calculate the YTM of a bond using its dirty price. However, I believe this is incorrect and the clean price should be used. I didn`t find any reference in the CFA curriculum that clarifies this.
If we buy today, 29.06.2018 a bond that matures in 26.03.2035 and pays a coupon of 3.125% once per annum and with a market price of 106.16, we will pay extra for the accrued interest which is 95/365 (act/act) or 0.26 years x 3.125 = 0.813. So, the clean price would be 106.16 - 0.813 = 105.347. That produces a YTM of 2.72%, however if we use the dirty price it would produce a YTM of 2.66% and this appears to be used by most brokers here.
Technically, we pay the interest at settlement and get back this accrued interest plus the interest for the remaining 270 days when the next coupon is paid in full. So, instead of getting 2.312 at the next coupon date, we get 3.125 thus 2.312 + the accrued interest of 0.813. In some extreme cases of a short maturity bond this can produce significant differences.
So, why is dirty used over clean and shouldn`t clean be the appropriate measure?
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