When you look up a bond price on a trading screen, what you see isn’t always what you pay. Bonds are quoted at the clean price, but the actual settlement amount is the dirty price. The difference lies in accrued interest.
A bond typically pays interest, or coupon, at fixed intervals — semi-annually in most cases. Between these coupon payment dates, interest keeps accruing day by day. If the bond is sold in the middle of this cycle, the seller has already “earned” a portion of the upcoming coupon. To compensate for this, the buyer pays not only the quoted market price plus the accrued interest.
To illustrate, suppose a bond priced ₹1,000 carries an annual coupon rate of 10%, which means ₹50 coupon semi-annually ( ₹100 annually). If the bond is sold exactly three months after the last coupon payment, the seller has already accrued half of that coupon — ₹25 — even though it hasn’t been paid yet. The buyer therefore pays the dirty price — clean price (the quoted market value of the bond) plus the accrued interest of ₹25. In this case, it’d be ₹1,025.
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The clean price is often thought of as the “pure” market value of the bond, stripped of any interest that has accumulated since the last coupon date. It’s the figure that you’ll see quoted on exchanges.
For investors, the distinction matters.
Quoted prices or clean prices help compare bonds on a like-for-like basis without being distorted by coupon timing.
How clean price moves
The clean price shows a bond’s worth based on current interest rates in the market. The clean price changes with market interest rates. If rates go down, bond prices go up, and if rates go up, bond prices go down.
Here is an example of clean prices in action. Imagine you buy a bond worth ₹1,000 that pays coupon of 10% annually. Now, how this bond’s price moves depends on what’s happening in the market.
If interest rates in the market drop and new bonds are paying only 9%, your bond suddenly looks more attractive because it still pays ₹100. Investors will be willing to pay extra to get that higher return and your bond’s price will go up.
On the other hand, if interest rates rise and new bonds are offering 11%, your bond becomes less appealing. To make up for the lower interest, investors will only buy it at a discount.