New bond investors are often surprised the first time they sell a bond before the next interest payment date and the price doesn't match what they expected. The gap usually comes down to one concept: accrued interest.
The problem accrued interest solves
Say you bought a bond at issuance for INR 100, with a 10% annual coupon. Six months later, you decide to sell. You've earned six months' worth of interest, or INR 5, that hasn't actually been paid to you yet, because coupons are paid annually, not daily. If you sold at exactly INR 100, you'd be walking away from that INR 5 you've rightfully earned.
That's not how bond markets work. Instead, you sell at around INR 105, capturing the interest you've accrued.
Clean price vs. dirty price
The INR 100 in that example is the clean price, which is the bond's quoted price excluding any interest earned since the last coupon payment. The INR 105 is the dirty price, which includes both the clean price and the accrued interest. So when a platform shows you a bond's price, check whether it's displaying the clean price or the dirty price. The two can differ meaningfully depending on how much time has passed since the last coupon date.
So no, you don't lose the interest by selling early
This is the reassuring part: because accrued interest gets folded into the dirty price, selling a bond before its next coupon date doesn't mean forfeiting the interest you've earned so far. The buyer pays you for it upfront, as part of the purchase price, and then collects the full coupon themselves when it's eventually paid — effectively “refunding” themselves the portion that was yours. Continuing the example: the buyer pays you INR 105, and six months later receives INR 10 in coupon payments. Of that, INR 5 simply reimburses the accrued interest already paid to you, while the remaining INR 5 is the buyer's own earned interest.
Why this matters for comparing bonds
If you're comparing two bonds with identical coupons and maturities but different quoted prices, accrued interest is often the reason, rather than any meaningful difference in the underlying bonds themselves. Always check when the last coupon payment was made before assuming a price difference reflects credit risk or market sentiment.
Record date: the other date that matters
Closely related is the record date, which is the date on which the issuer determines who is entitled to receive the next interest or principal payment. Whoever holds the bond on the record date receives that payment, regardless of how briefly they've held it. This is why bond prices often move slightly around record dates. A buyer purchasing just before the record date may be willing to pay a higher price for an upcoming payment they are about to receive.