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

A client buys a G-Sec on the secondary market and asks how the accrued interest is treated in the price paid. Which statement is correct?

The dirty price equals the clean price plus accrued interest since the last coupon date. The buyer pays the seller for the interest earned during the seller's holding period, so the amount settled exceeds the quoted clean price.

  1. ADirty price equals clean price plus accrued interest since the last coupon dateCorrect
  2. BDirty price equals clean price minus accrued interest
  3. CClean price equals dirty price plus accrued interest
  4. DAccrued interest is never paid by the buyer

Explanation

The buyer compensates the seller for interest earned since the last coupon date. The total amount paid (dirty or invoice price) is therefore the clean price plus accrued interest. Subtracting it, as in the second option, would reverse the logic.

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