I wanted to get this clear. when we buy a bond in between coupon dates, do we pay the dirty price to the seller or do we pay the clean price and then give the accrued interest when we get the coupon
anyone have a diagram for this?
When you buy a bond you will always pay the Dirty Price.
Dirty Price = Clean Price + Accrued Interests. So the price you will pay already inclue the interests
A little further explaining:
Imagine you want to buy a bond from me. This bond pays a coupon on every December 30th. So we agree on price say 95 (the standard is to agree on a Clean Price). Now, I have owned this bond for all the year, expecting to collect that coupon on December, but if I give it to you today, I wont collect it at all! This would be unfair, so in order to compensate for this, you would also pay me for the accrued interests i have implicitly gained on these 11 months. So your will pay me 95 + accrued interests (also known as dirty price).
Hope this was helpful…
Exactly. At bond sale, it’s like jagarciap is ‘paying’ you the accrued interest, but during the next coupon payment, its like you give it back to him.