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Open a bond quote on your demat app, and you will see one number. Buy the bond, and you will find the amount debited differs from the quoted price. The difference you see is not a fee or a mistake; it’s accrued interest, and knowing this will help you better understand bond prices. Whether it’s buying government securities, purchasing corporate NCDs, or understanding a bond fund’s NAV, the concepts of clean price, dirty price, and accrued interest are all interconnected. They’re not complicated once you see the logic, so let’s unpack them one at a time, with the numbers as they stand in India today.
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What Is the Clean Price of a Bond?
The clean price is the price of the bond minus the accrued interest for the duration of time since the last coupon payment. This is the price posted on exchanges, newspapers, and trading terminals. For a buyer, this price is helpful since all bonds are compared on an equitable basis, regardless of the coupon payment cycle.
What Is the Dirty Price of a Bond?
The dirty price (also called the “full price” or “invoice price”) is what you actually pay at settlement. It equals: Dirty Price = Clean Price + Accrued Interest
Suppose an investor purchases a bond in the middle of a six-month coupon cycle. The investor has to pay the seller the accrued or earned interest. The clean price is adjusted for accrued interest, and the seller gets paid even if the next coupon gets credited to the buyer’s account.
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How Accrued Interest is Calculated
Determining accrued interest relies on two factors: the coupon rate and the day-count convention used to compute the time between the last coupon date and the settlement date. The day-count convention is set on the type of instrument and isn’t optional.
- Government securities (G-Secs): 30/360 convention: Every month is treated as having 30 days, and the year as 360 days
- Corporate bonds/NCDs in India: Typically Actual/Actual
- Money market instruments (T-Bills, CPs): Typically Actual/365
A quirk worth knowing: under India’s 30/360 convention, the 30th and 31st of the month are treated as the 30th; and 28 February (or 29 February in a leap year) is treated as any ordinary day of the month and is not rounded up to 30. It is a small detail but might cause problems for people doing calculations by hand in the late days of the month.
Quick example: Say a G-Sec has a 7.10% annual coupon (paid semi-annually) on a face value of ₹100, and you’re buying it 45 days into the current coupon period. Using 30/360:
Accrued Interest = 100 × 7.10% × (45/360) = ₹0.8875
So if the clean price quoted is ₹99.50, the dirty price (what you actually pay) is ₹100.3875.
| Concept | What It Means | Who Typically Uses It |
| Clean Price | Price excluding accrued interest | Quoted on exchanges, used for comparison |
| Dirty Price | Clean price + accrued interest | Actual settlement amount paid |
| Accrued Interest | Interest earned since last coupon, not yet paid | Compensates seller for holding period |
| Day-Count Convention | Rule for counting days in the accrual period | 30/360 for G-Secs, Actual/Actual for corporates |
Why This Matters for Indian Investors Right Now
This isn’t just textbook theory. Following the RBI keeping the repo rate at 5.25% in its August policy review and the 10Y G-Sec yields hovering at 6.7-6.8% in early August, investments in bonds have been gaining popularity among Indian retail investors. Part of it has been the launch of RBI Retail Direct and OBPPs, and part of it has been the launch of exchange-traded G-Secs (NSE goBID, BSE Direct) and listed NCDs. Most of these retail platforms show you the dirty price, meaning you pay the full price inclusive of accrued interest and therefore do not have to calculate anything. In contrast, institutions trading in the wholesale/OTC market negotiate clean prices, with accrued interest settled separately.
Here’s what understanding this difference gets you:
- You will not be surprised when settlement differs from the quoted price
- You can verify that a bond is not trading at a significant discount simply because it’s about to pay a coupon
- It will enable you to correctly compare the yields of bonds with varying coupon payment dates
A Word on Ex-Interest Trades
Sometimes a bond is traded ‘ex-interest’ near to the record date, meaning that the buyer of the bond will not receive the coupon payment although they possess the bond at the payment date. In such a situation, the accrued interest in the pricing can even become negative. This is more common for corporate bonds than for G-Secs and is worth checking on the term sheet prior to purchasing near a payment date.
The True Meaning of Clean Price, Dirty Price, and Accrued Interest
None of this changes a bond’s value. All this does is change how a bond’s value is allocated between the price you pay and the interest you owe on top of that. After you understand that quoted prices are almost always clean (without accrued interest) and settlement amounts are almost always dirty (with accrued interest), bond investing doesn’t feel complicated anymore.
Whether you are about to place your first order on RBI Retail Direct, compare NCD yields before you buy some NCDs, or are trying to figure out why your bond fund’s NAV changed without a change in interest rates, just understanding this one distinction will solve almost all your problems. Get comfortable with it, and every other bond concept gets a little easier to follow.
Bond Pricing Frequently Asked Questions
The clean price is the quoted market price of a bond excluding accrued interest. It is commonly used when displaying bond prices in the market.
The dirty price is the total amount payable for a bond, including accrued interest since the last interest payment date.
Accrued interest is the interest that has accumulated on a bond since its last coupon payment date. When a bond is sold between coupon dates, the buyer typically compensates the seller for this accumulated interest.
The clean price excludes accrued interest, while the dirty price includes it. In simple terms: Dirty Price = Clean Price + Accrued Interest.
The seller held the bond for part of the current coupon period and therefore earned the corresponding portion of the upcoming interest. The buyer compensates the seller for that accrued amount when purchasing the bond between coupon dates.
Disclaimer
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