Bond Price
Bonds are generally viewed as a more stable and predictable form of investing compared to the stock market since they help the holders ride out the volatility of the stock market, no matter which direction the market might be headed. But new investors, and sometimes, even seasoned investors, find challenging to understand bond pricing.
In this blog, we will understand what the clean and dirty price of a bond is and how it is relevant.
What Is a Bond Price
While it is relatively simple to understand what a bond is, bond’s Clean Price and Dirty Price can be confusing.
The coupon payment could be made monthly, quarterly, half yearly or annually. Half-yearly coupon payments are known to be the most common but there is no hard and fast rule.
Investors have the option to hold on to their bonds till maturity. But the concept of clean and dirty price comes in when a bondholder wants to sell it to another buyer before maturity.
Understanding the Change in Bond Ownership
While the face value of the bond as of 1st June will definitely be considered, what happens to the interest accrued for 2 months – April and May?
The next interest receivable by the then bondholder, Gopal, will be on the 30th of September, but will it be fair and accurate for Gopal to receive the interest payment of the whole 6 month period if, in reality, he will have owned the bond only for 4 months – June to September?
The bond issuers do not get into these details of bifurcating the coupon payments between new and current bondholders.
Getting Familiar with Government Bonds
Government securities are one of the most common bonds in India. They are known as G-Sec.
While purchasing a bond, an investor can find all the details from date of maturity, yield on offer, face value, etc. on government websites like CCIL or RBI. An important point to note is that all the bonds on these websites show the clean price of a bond.
Hence, if you are not purchasing the bond on the date of coupon payment, you will likely have to pay the accrued interest to the investor who you are buying from.
Clean And Dirty Price Affecting the Decision Making of Bond Purchases
Dirty price helps the bondholders to be assured that they will always get paid the interest accrued for a certain period, irrespective of the timing of their selling the bond.
This strongly works in favour of an investor during the decision-making of buying a bond.
On the other hand, during the time of selling the bond, the new buyer who buys from the previous bondholder is usually aware of the fact that he shall have to pay the interest accrued for a certain period.
Conclusion
With bonds becoming a popular investment option for consumers, as well as institutions and a stable medium to raise capital for businesses, the above article will help you understand the basics of how this instrument works.
If you want to know more about bonds and how they work, check out Aspero.
Frequently Asked Questions
What are the key takeaways from this article?
Bonds are generally viewed as a more stable and predictable form of investing compared to the stock market since they help the holders ride out the volatility of the stock market, no matter which direction the market might be headed. But new investors, and sometimes, even seasoned investors, find challenging to understand bond pricing.
Who should read this article?
This article is designed for retail investors, first-time bond buyers, and anyone looking to understand fixed income investments in India.
How does this relate to my investment portfolio?
Understanding these concepts helps you make informed decisions about asset allocation and build a diversified investment portfolio.
