The first time I bought a bond, the quote said ₹980 but my contract note showed ₹990. I hadn’t misread anything. I had just met a quiet rule of the bond market: the quote you see is usually not the cash you pay. That small gap is the difference between clean price vs dirty price.
The idea in plain words
- Clean price is the sticker price of the bond. It leaves out any interest that has built up since the last coupon date.
- Dirty price is the all-in amount I settle. It equals clean price plus the interest that has accrued up to the day I buy.
Think of a bond like a taxi meter. The coupon is the meter ticking along between two payment dates. If I step into the ride halfway through, I reimburse the outgoing passenger for the distance already covered. That reimbursement is accrued interest. I pay it today, and I still receive the full coupon when it is paid.
Why interest “accrues”
Coupons are paid on fixed dates—semiannual, quarterly, or annual—while trading happens every working day. If the seller held the bond for part of this period, they earned a slice of the next coupon. Accrued interest settles that slice fairly between buyer and seller. Markets calculate it using three ingredients: the coupon rate, the time elapsed since the last coupon to settlement, and the bond’s day-count convention (Actual/Actual, 30/360, etc.). I always check the term sheet so my math matches the dealer’s.
A quick example with numbers
Say I buy a ₹1,000 face value bond with an 8% coupon, paid twice a year. The market quotes a clean price of ₹980.
- The half-year coupon is ₹40.
- If 45 days have passed out of a 180-day period, the accrued interest is ₹40 × 45/180 = ₹10.
- Dirty price = ₹980 + ₹10 = ₹990.
That ₹10 doesn’t make the bond “expensive.” It simply compensates the seller for their share of the upcoming coupon. On the coupon date, I still receive the full ₹40.
How I use this in decisions
Comparing bonds fairly. Clean prices let me compare two issues at different points in the coupon cycle without being misled by where we sit between payments. When I’m screening in the bond market, I focus on yields derived from clean prices.
Managing cash. The dirty price is the real cash outflow (or inflow) on settlement. When I build a ladder or a barbell mix, I budget with dirty prices so there are no last-minute funding surprises.
Reading yield correctly. Yields—yield to maturity or yield to call—are quoted off clean price. That keeps analytics consistent across bonds, even though settlement uses dirty price.
Getting tax reporting right. Accrued interest and coupon income can be treated differently for reporting. I capture both from contract notes and confirm the treatment with my advisor.
Simple checks that save trouble
- Confirm whether the market is quoting clean (most do) or dirty.
- Note the settlement date and the day-count so your accrued interest aligns with the dealer’s figure.
- On screen, compare yields; in your bank account, plan for the dirty price.
In short, clean price vs dirty price is not a technical footnote. It is the bridge between the quoted value and the money that moves. The clean price keeps comparisons honest; the dirty price keeps my cash planning honest. Once I learned to read both together, bond quotes stopped being mysterious and started becoming useful.
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