ActEd notes, Chapter 11 Why does the price of a bond formula in section 1.2 of chapter 11 have a third expression. No-one else on the web seems to mention it.......Anyone?
The third term makes it a clean price, this is the price the bond is quoted at. To get the price at which it trades at, you need to add on the proportion of the next coupon you have earned at the valuation date.
Yes, the two expressions in the square brackets sum to the dirty price. This is the price at which you actually trade the bond. It represents the disccounted present value of the future coupon and capital payments at the GRY. The final term is the accrued interest. This is the portion of the next coupon payment that is deemed to have accrued (for tax purposes) since the last coupon was paid. The three terms together (ie dirty price less accrued interest) give the clean price, which is the price actually quoted in the marketplace.
