The meter is always running

1Two bonds, one promise, two prices

Two government bonds. Same issuer, same coupon, same maturity, same rating, sitting side by side on the same screen on the same morning. One of them paid its interest yesterday. The other pays tomorrow. They are not worth the same money, and they should not be.

The reason is that a bond does not pay interest the way a salary arrives. It pays in lumps, on fixed dates. In between those dates the interest does not stop being earned. It is earned every single day, quietly, and it is simply not handed over yet. A meter is running.

Whoever is holding the bond on the payment date collects the entire lump, however long they have held it. Buy a bond one day before its coupon date and you are handed a full period of interest for a single day of ownership. That would not be fair to the seller. They held the bond for almost the whole period, and that interest was earned while it was theirs. So when you buy, you pay the seller for every day the meter ran while they owned it.

That running total has a name. Accrued interest is the interest built up since the last payment date and not yet paid out. A clean price is the price of the bond without the accrued interest. A dirty price is the price with the accrued interest included. One bond, two numbers, and the gap between them changes every day.

Read the chart this way. The flat dashed line is the clean price, which does not move for this reason. The climbing line is the accrued interest stacked on top of it. On the payment date the interest is handed over and the climb starts again from zero.

2How often the meter resets

An 8 percent bond paying once a year has, on the day before payday, a full ₹8 of interest stacked inside its price. The same 8 percent paid every month never has more than 67 paise hiding in there. Same coupon, same bond, same year. The schedule alone changes how much of the screen price is interest rather than bond.

In India, government bonds are generally simple: they either pay interest twice a year, or, like Treasury bills, pay nothing along the way and hand everything back in one lump at the end. Tax free bonds pay once a year. Corporate bonds can come with any schedule at all: monthly, quarterly, twice a year, once a year, or cumulative, which means nothing is paid until maturity and the interest rolls up inside the bond.

Two corporate bonds from the same company can pay on completely different schedules. There is no normal, so the schedule is a thing to look up rather than assume.

A cumulative bond deserves its own warning. The meter runs on it exactly like any other bond, but it never resets, because nothing is ever paid out until the end. Accrued interest on a cumulative bond just climbs for years. By the time you buy one in the secondary market, a large part of what you hand over is not the bond at all. It is interest the previous holder earned and never collected.

3Which price your screen is showing

Here is the question that decides whether the accrued interest is a surprise or not: when you type a price into an order, is that the clean price or the dirty one?

There is a correct answer, it is written down, and it depends entirely on where the order goes.

Figure 1

So on the exchange, through an ordinary broking app, the number on screen already contains the interest. Nothing extra is debited afterwards. The whole thing is one price.

Go through a different door and the answer flips. NDS-OM, the Reserve Bank's own dealing system for government bonds, matches orders in clean prices and settles in dirty ones, with the accrued interest added on top as its own line. The request for quote platform, which every online bond platform routes through by regulation, negotiates the price and the accrued interest as two separate fields.

This is why two people can describe the same purchase in flatly contradictory ways and both be telling the truth. One bought on an exchange and saw a single number. The other went through a bond platform and watched an extra amount appear at settlement. Nothing went wrong in either case.

What to do with this. Find the accrued interest line on your contract note before you need it. If there is one, your price was clean. If there is no such line and the consideration is just price times quantity, your price was dirty and the interest was already in it.

4A price of ₹1,083 is not 8 percent over face

A tax free bond with a face value of ₹1,000 shows a price of ₹1,083. The instinct is immediate: this thing is 8.3 percent above face, that is expensive, and I am paying a fat premium for a bond that will hand me back ₹1,000 at the end.

The instinct is wrong, and the reason is the meter from section 1.

That bond pays once a year, every 19th Dec. On a day in mid July, 209 days have gone by since the last payment. At a coupon of 7.38 percent, those 209 days are worth ₹42.26 of interest sitting inside the price. Take it out and the bond itself is priced at ₹1,040.74.

Four percent over face, not eight. Half the premium you thought you were paying is not a premium at all. It is interest the seller earned, which you are buying from them, and which the issuer will hand straight back to you in December.

This matters most on exactly the bonds a retail buyer is most often shown. A bond that pays once a year can have a full year of interest stacked inside its price on the day before payday. A cumulative bond can have years of it. The nearer the coupon date, the more of the sticker price is somebody else's interest, and the more expensive the bond looks for no reason at all.

The habit worth building. Before you judge any bond's price against its face value, find out when it last paid and take the accrued interest out. Compare clean prices with clean prices. Everything else is comparing a bond to a bond plus a stopwatch.

5How the days are counted

Every accrued interest number in this chapter comes out of one sum. Take the coupon, find what share of the year has gone by since it was last paid, and charge that share.

It looks like there is nothing in that to argue about. There is. Both day numbers in it, the days that have passed and the days in the year, are decided by a rule. That rule is called the day count convention, and Indian bonds use three of them.

Here is each one worked out, first the days and then the money.

Rule one: 30/360, every month is 30 days

Government bonds pretend the calendar is tidy. Every month has 30 days and every year has 360.

Take a bond that trades this year. The 7.10% GS 2034 pays its interest on 8th Apr and 8th Oct. Suppose you buy it for settlement on 31st Aug 2026. How many days of interest do you owe the seller since 8th Apr?

Now the money. The bond pays ₹7,100 a year on every ₹1 lakh of face value, so the seller is owed ₹7,100 × 142 ÷ 360 = ₹2,800.56.

Rule two: Actual/Actual, count the real days

Corporate and tax free bonds count the days a calendar would. Count the real days since the last coupon, divide by 365, and charge that share of the yearly coupon. The bottom number only ever changes in a leap year: when the year has a 29th Feb in it, divide by 366 instead.

Take the same stretch of the same bond, 8th Apr to 31st Aug, and count it the way a corporate bond would, month by month. You can see exactly where the two rules part ways.

Three days apart, and every one of them comes from a month that is not really 30 days long.

Now the money. Same ₹7,100 a year on every ₹1 lakh, but real days over a real year. 2026 is not a leap year, so the seller is owed ₹7,100 × 145 ÷ 365 = ₹2,820.55. Side by side:

On this trade the two rules are ₹19.99 apart on every lakh, and neither side chose that. The kind of bond chose it.

Rule three: Actual/365, real days over a fixed year

Treasury bills, the government's short loans of 91, 182 or 364 days, use the third rule. They pay no coupon at all. You buy one below ₹100 and get ₹100 back at the end, so there is no accrued interest to split with anyone. The day count only decides how that discount is turned into a yield, and for Treasury bills RBI counts real calendar days over a 365 day year: Actual/365.

The 91 day bill auctioned on 2nd Sep 2026 sold at ₹98.7056, settled on 3rd Sep and repays ₹100 on 3rd Dec.

5.2599% is exactly the yield RBI printed for that auction. Count the same bill on 30/360 and it would hold for 90 days, not 91, and show 5.2455%.

Check it against RBI

RBI publishes a worked example of exactly this arithmetic in its primer on the government securities market. Run it on the 30/360 rule and you land on its number to the paisa.

The trade: ₹5 crore face value of the 8.83% GS 2023 bond, settling on 30th Jan 2014, at a clean price of ₹100.50. The last coupon was paid on 25th Nov 2013.

Where does 65 come from? On a calendar, 25th Nov to 30th Jan is 66 days. On 30/360 it is five days to the end of November, 30 for December, which really has 31, and 30 for January up to the 30th. That makes 65.

The meter stops the day before settlement. RBI describes the count as running to 29th Jan for a trade settling on 30th Jan. That is the same thing the formula does when you plug in the settlement date: it counts the coupon day itself and stops one day short of the end. The day the bond actually moves belongs to the buyer, so the seller is not paid for it.

Change nothing about that trade except the counting rule and the money moves:

Same bond, same day, same agreed price. The counting rule alone is worth ₹1,200, or ₹2.40 for every lakh of face value. Only one 31 day month sits inside this stretch, so the gap is small. On the longer 7.10% example above it was ₹19.99 a lakh. Either way, nobody negotiates it. It is fixed by what kind of bond you are holding, and you are expected to know.

Which bonds use which, and why

Three rules in one market

Step back and this is a strange arrangement. One country, one currency, and three different answers to the question of how long a month is. A government bond says May has 30 days. A corporate bond says it has 31. A Treasury bill agrees with the corporate bond about May, but in a leap year it still insists the year has 365 days while the corporate bond counts 366.

So buy ₹1 lakh of a government bond and ₹1 lakh of a corporate bond with the same coupon, on the same day, after the same last payment date, and you owe the two sellers different amounts of interest for exactly the same stretch of time.

Nobody designed it this way. Each rule arrived with its own corner of the market. Government bond dealers kept the convention they had always used. SEBI, writing rules for bonds sold to ordinary investors, chose real days. The money market kept its own habit. Each choice made sense where it was made. Put side by side, they make no sense at all, and no single body has the job of making them agree. The rest of the world is no tidier. International bond rulebooks list several conventions side by side, and over the years the list has grown rather than shrunk.

Three kinds of paper, three ways of counting. Government bonds pretend every month has 30 days. Corporate and tax free bonds count the real days in each coupon period. Treasury bills count real days over a 365 day year. Nothing on the screen tells you which one it is using.

6If every month is 30 days, what happens to February?

The 30/360 rule says every month on a government bond is thirty days long. For a 31 day month that is easy: one day is quietly dropped. Now ask the awkward question. February has twenty eight days. If the rule still counts it as thirty, where do the two missing days go?

They land all at once, on the first morning of March. Take a government bond whose coupon is paid on 28th Feb and buy it for settlement on 1st Mar. You have held it for one day. The formula counts 30 × 1 + (1 − 28) = 3 days, so you pay the seller three days of interest for one day of ownership. The market body that writes the convention prints this exact case.

Treat it as a quirk, not a leak. Over a full half year the rule always comes to exactly 180 days, so nobody is short changed across the period. The two extra days just change hands on one morning, from whoever buys to whoever sells, and the meter runs a little slower for the rest of the period to even it out.

Corporate bonds never do this. They count real days, so February gets twenty eight, March gets thirty one, and a day of holding is charged as a day.

7The day the coupon stops being yours

A record date is the day the issuer checks its list of bondholders to decide who gets the next interest payment. Whoever is on that list at the end of the day is paid the coming coupon, whatever happens to the bond afterwards.

Why does it need one? The issuer has to pay the coupon to whoever owns the bond. But a bond can change hands on any working day, and thousands of people can own a piece of it. If people keep trading right up to the last minute, how does the issuer decide who to pay?

It cannot simply look on payday, because paying is not instant. The issuer's registrar has to get the list of holders from the depositories, work out what each one is owed, deduct tax where it applies, and send money to every bank account. That takes days. If the list kept changing while that work was going on, some interest would land with people who had already sold, and some would miss people who had just bought.

So the issuer fixes the list in advance. The record date gives every back office in the chain time to get the payment right. How far ahead it falls depends on the kind of bond.

Here is what that means in practice. A tax free bond pays its interest on 1st Oct. You buy it on 20th Sep, eleven days early. The record date was 16th Sep, fifteen days before payment, so the seller was on the list and you were not. When the interest is finally paid on 1st Oct, it goes to the seller, not to you, even though you own the bond by then. You did nothing wrong and nothing broke. You simply bought after the record date.

And it does not cost you anything. The price already reflects it. Buy after the record date and you pay less, by the interest you will not receive, so you are never paying for a coupon that goes to someone else. You do not need to work anything out. The only thing that changes is whose bank account the 1st Oct interest lands in.

None of this is hidden. The issuer has to tell the exchange the record date at least three working days before it arrives. Everyone can see it coming. Almost nobody looks.

From the record date to the payment date, the bond keeps trading, but the coming coupon no longer travels with it. Which produces the one number on a bond screen that makes people think their platform is broken.

Buy inside that window and your accrued interest is shown as a negative number. It is not a glitch, and it is not a discount being handed to you out of kindness. It is the arithmetic staying honest. You are about to own a bond for a few days without being paid for those days, because the coupon has already been assigned to the seller. So the price is adjusted down by exactly what those days are worth, and no more.

On an 8 percent bond paying twice a year, with a fifteen day record date, that negative figure is about 33 paise per ₹100 of face value at its largest. On a bond with a face value of ₹1,000 it is ₹3.30. Small, correct, and alarming the first time you see it.

Through all of this the bond keeps trading. After the record date you can still buy and sell it. Only the coming coupon has already been spoken for. SEBI wrote that down for exchange traded debt.

There is one exception, and it comes at the very end. The last record date in a bond's life is the one before its final repayment. After that date the bond stops trading altogether. This is the shut period: a freeze on transferring the bond at all, so the list of people to be repaid cannot change while the money is being sent out. It applies to every kind of bond, government or corporate. If you still hold the bond on that last record date, you are simply repaid. If you wanted to sell, it had to be before.

Figure 2

8Four things to check before you buy

None of this needs arithmetic at the moment of buying. It needs four lookups, and all four are published.

Keep every contract note. The clean, accrued and dirty lines on it are the only record of what you paid for the bond and what you paid for somebody else's interest, and the two are taxed as different things.