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NISM Certifications · NISM-Series-VI: Depository Operations · Special Services - Debt Instruments and Government Securities

A client buys a dated G-Sec from the secondary market on a date between two coupon dates and the settlement price is quoted as a clean price. Which statement about the amount the buyer actually pays is correct?

The buyer pays the clean price plus accrued interest from the last coupon date up to settlement, which is the full or dirty price. This compensates the seller for the coupon earned while holding the security before the buyer receives the next coupon.

  1. AThe buyer pays the clean price plus accrued interest from the last coupon date to settlementCorrect
  2. BThe buyer pays only the clean price with no other amount
  3. CThe buyer pays the clean price minus accrued interest
  4. DThe buyer pays the face value irrespective of the clean price

Explanation

The invoice or dirty price equals the clean price plus accrued interest from the last coupon payment up to the settlement date. The seller held the bond for that period, so the buyer compensates the seller. Subtracting the accrued interest or ignoring it would shortchange the seller.

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