Fixed Income and Debt: Clean Price, Accrued Interest and Yield
Fixed Income and Debt covers government securities, treasury bills, state development loans and corporate bonds: quoting conventions, the price-yield relationship and settlement. The exam favours accrued-interest arithmetic and yield intuition rather than long derivations.
Market conventions
- G-secs are quoted on a clean price per ₹100 face value; the traded (dirty) price adds accrued interest.
- Settlement in G-secs is T+1.
- Price and yield move inversely: when yield rises, price falls, and sensitivity is greater for longer duration and lower coupon.
- T-bills are issued at a discount and redeemed at face value; the quoted yield is a discount yield, which is not the same as a bond's yield to maturity.
Worked example. A bond with an 8% coupon and ₹100 face value last paid interest 91 days ago. Accrued interest on an actual/actual basis = 8 × 91/365 = ₹1.99. If the clean price is ₹101.50, the buyer pays 101.50 + 1.99 = ₹103.49 per ₹100 face value. The seller receives the accrued interest, compensating for the coupon the seller will not receive.
Traps. Paying the clean price as if it were the total consideration. Comparing a T-bill discount yield directly with a bond YTM. Assuming a higher coupon always means higher price sensitivity - the opposite holds. And forgetting that credit spread, not the benchmark yield alone, drives corporate bond pricing.