New Delhi, Sept. 19 -- 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 Rs.1,000 carries an annual coupon rate of 10%, which means Rs.50 coupon semi-annually...