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DEFLATION.
What Is Deflation?
Deflation is a general decline in prices for goods and services, typically associated with
a contraction in the supply of money and credit in the economy. During deflation, the
purchasing power of currency rises over time.
KEY TAKEAWAYS
Deflation is the general decline of the price level of goods and services.
Deflation is usually associated with a contraction in the supply of money and
credit, but prices can also fall due to increased productivity and technological
improvements.
Whether the economy, price level, and money supply are deflating or inflating
changes the appeal of different investment options.
RECESSION.
What is a Recession?
A recession is a macroeconomic term that refers to a significant decline in general
economic activity in a designated region. It had been typically recognized as two
consecutive quarters of economic decline, as reflected by GDP in conjunction with
monthly indicators such as a rise in unemployment. However, the National Bureau of
Economic Research (NBER), which officially declares recessions, says the two
consecutive quarters of decline in real GDP are not how it is defined anymore. The
NBER defines a recession as a significant decline in economic activity spread across the
economy, lasting more than a few months, normally visible in real GDP, real income,
employment, industrial production, and wholesale-retail sales.
KEY TAKEAWAYS
CLEAN PRICES.
What Is the Clean Price?
The clean price is the price of a coupon bond not including accrued interest payments.
The clean price is typically the quoted price on financial news sites. This price does not
include any interest accrued between the scheduled coupon payments for the bond. The
opposite of a clean price is the dirty price.
KEY TAKEAWAYS
The clean price is the price of a coupon bond not including any accrued interest.
That is, it doesn't include the accrued interest between coupon payments.
The clean price is typically the quoted price on financial news sites.
Dirty price is the price of a bond that includes accrued interest between coupon
payments.
When quoting prices for bonds, they may be either the clean price or the dirty price. The
dirty refers to the price of a bond including accrued interest based upon the coupon rate.
If a bond quotes between coupon payment dates, the accrued interest up to that day is
reflected in the price.
In short, a dirty bond price includes accrued interest while a clean price does not. The
clean price is quoted more often in the U.S. while the dirty price is quoted more often in
Europe.
Bond coupons, or interest payments, are usually paid semiannually, but depending on
the issuer you may find bonds paying a yearly, quarterly, or even monthly coupon.
Bonds are quoted as either a percentage of their par value, or face value, or in dollar
terms. For example, if a bond is quoted at 98, this indicates that it is 98% of the bond's
par value. Therefore, if the bond's par value is $1,000, the bond price is $980. The $980
price quote is the clean price of the bond since it does not reflect the accrued interest on
the bond. Although bonds are typically quoted in terms of the clean price, investors pay
the dirty price unless the bond is purchased on the coupon payment date.
The clean price is $960 for the bond. However, the bond price would be quoted to
investors as $960 plus any accrued interest. The broker determines the daily per Diem
of interest that's accumulated and adds that amount to the clean price. The all-in price or
dirty price would vary depending on how many days since the last coupon payment.
Interest accumulates immediately following the last coupon payment
DIRTY PRICES.
What Is Dirty Price?
A dirty price is a bond pricing quote, which refers to the cost of a bond that
includes accrued interest based on the coupon rate. Bond price quotes between coupon
payment dates reflect the accrued interest up to the day of the quote.
In short, a dirty bond price includes accrued interest while a clean price does not.
KEY TAKEAWAYS
A dirty price includes accrued interest along with a bond's coupon payment.
If a bond quotes between coupon payment dates, the price cited includes accrued
interest up to the day of the quote.
In short, a dirty bond price includes accrued interest while a clean bond price
does not.
Clean quotes are typical in the United States, and dirty quotes are standard in
Europe.
Accrued interest is earned when a coupon bond is currently in between coupon payment
dates. As the next coupon payment date approaches, the accrued interest increases each
day until the payment of the coupon. On the day of the coupon payment, the clean price
and dirty price are equal since there is no accrued interest until the next market day.
The dirty price is sometimes called the price plus accrued. In the United States, the
clean price is quoted more often while in Europe, the dirty price is the standard.
The dirty price allows a seller to calculate the actual cost of a bond since the bond might
have accrued interest from the previous coupon payment date. So, the date of the sale
would reflect the clean price plus any accrued interest, calculated daily. As a result, a
buyer's actual price paid for the bond is higher than the quoted price on financial
websites because it accounts for the accrued interest and the broker's commission.
If
Usually, if the Central Bank increase base rates, it will lead to higher commercial rates
too. See: how are interest rates set.
Por lo general, si el Banco Central aumenta las tasas base, también conducirá a tasas
comerciales más altas. Ver: cómo se establecen las tasas de interés.