How it is calculated
Clean price = Σ C / (1 + y/f)^(f·t) + F / (1 + y/f)^(f·T)- Dirty price = clean price + accrued interest
- C : each coupon payment; F, face value repaid at maturity
- y : the yield you require, as a decimal per year
- f : coupon payments per year; t, T, years until each coupon and until maturity
A worked example
- 1A ₹1,00,000 bond pays an 8% coupon semi-annually with exactly 4 years remaining.
- 2Market yields for comparable bonds have risen to 10%.
- 3Each coupon is ₹4,000, and there are 8 of them left, plus ₹1,00,000 at the end.
- 4Discounting all of it at 10% compounded semi-annually gives ₹93,537.
The bond still pays exactly what it always promised. It is worth ₹6,463 less than face value purely because a buyer today can get 10% elsewhere and will not accept 8% unless the price compensates. Nothing about the issuer changed.
Clean price, accrued interest and dirty price
Bonds are quoted at the clean price, which deliberately excludes interest that has built up since the last coupon date. Quoting this way keeps the screen price stable, it does not sawtooth upward through the coupon period and drop on payment day.
The money that actually leaves your account is the dirty price: clean price plus accrued interest. You are reimbursing the seller for the portion of the next coupon they earned by holding the bond before you did. When that coupon arrives, you receive all of it, including their share back.
This trips up a lot of first-time buyers, who see one number on screen and a larger number on the contract note. Nothing has gone wrong. The difference is accrued interest, and you get it back at the next coupon.
Why prices move when interest rates move
A bond's cashflows are fixed at issue. The only thing that can adjust when market rates change is the price. If rates rise, existing bonds paying the old lower coupon must get cheaper before anyone will buy them; if rates fall, existing bonds paying the old higher coupon become worth more.
How much the price moves depends on how long the money is locked up. A bond maturing next year has little room to move, because you get your principal back soon and can reinvest at the new rate. A bond maturing in fifteen years has far more, because you are stuck with an off-market coupon for fifteen years. This sensitivity is what duration measures.
The practical consequence: long-dated bonds are not simply higher-yielding versions of short-dated ones. They carry materially more price risk, and that risk shows up whenever you need to sell before maturity.
Why the market price differs from the calculated price
This calculator prices a bond off a single yield. Real market prices also reflect how easily the bond can be sold. Most Indian corporate bonds trade thinly, so a seller in a hurry accepts a discount and a buyer in a hurry pays a premium, the gap can be far wider than in equities.
Prices also reflect the market's current view of the issuer, which moves faster than the credit rating does. If a bond consistently trades cheaper than its calculated fair value, that is information, not an arbitrage opportunity.
Frequently asked questions
Why do I pay more than the quoted price when I buy a bond?+
Because the quoted price is the clean price and the settlement amount is the dirty price. The difference is accrued interest, the portion of the upcoming coupon that the seller earned while holding the bond. You are paying them for it, and you get it back in full when the next coupon is paid to you.
What does it mean when a bond trades at a premium or a discount?+
A premium means the price is above face value, which happens when the coupon is higher than what comparable new bonds pay. A discount means the price is below face value, usually because market rates have risen since issue or because the market has grown less confident about the issuer. At maturity you are repaid face value either way, so a premium bond gives back less than you paid and a discount bond gives back more.
How much does a bond price move for a 1% change in rates?+
Roughly its duration, as a percentage. A bond with a duration of 4 loses about 4% of its value when yields rise by one percentage point, and gains about 4% when they fall. The approximation is good for small moves and understates the gain and overstates the loss for large ones, because the price-yield relationship curves.
Is the face value always ₹1,000 or ₹1,00,000?+
It varies by issue. Older listed NCDs commonly used ₹1,000, while many post-2022 privately placed issues use ₹1,00,000, and SEBI has since reduced the minimum for new private placements to ₹10,000. Always check the actual face value on the specific ISIN, because every per-bond figure, coupon, accrued interest, redemption, scales from it.