If you strip away the jargon, a bond is just an IOU. You give money to a government or a company, and they promise to pay you interest plus your money back on a fixed date. Many Indian investors use bonds when they want more stability than stocks but better potential returns than a normal savings account.
Think of it like this: instead of you taking a loan from the bank, you are the one lending to the issuer. In return, you get a predictable cash flow. You can now even buy Government bonds directly through the RBI Retail Direct Portal.
1. Face Value vs Market Price: The Difference
Every bond starts with a Face Value, also called par value. In India, this is often ₹1,000 or ₹10,000, and it is the amount you are supposed to get back on the maturity date. This number doesn’t jump around every day.
The price you see on your broker app, however, is the Market Price. That price moves up and down based on interest rates and investor demand.
- If interest rates in the economy fall, old bonds with higher interest become attractive and their market price usually goes above face value (Premium).
- If rates rise, those same old bonds can look less attractive and may trade below face value (Discount).
So when you look at a bond, always ask: “Am I buying it at face value, at a premium, or at a discount?”
🧮 Bond Yield Analyzer
Check if you are getting a Discount Deal or paying a Premium.
Annual Interest
₹75.00Current Yield
7.89%Status
2. What is a Bond Coupon?
The coupon is just the interest rate printed on the bond. It is calculated on the face value, not on whatever price you are paying today.
Face value: ₹1,000
Coupon: 7%
You will get ₹70 per year as interest. This amount is usually fixed. Even if the bond price crashes to ₹900 or jumps to ₹1,100, the company still sends you exactly ₹70.
This regular cash flow is the main attraction for many retail investors. The catch is that the coupon alone does not tell you your real return if you are buying the bond at a different price than face value.
3. What is Bond Yield and YTM?
Yield answers a simple question: “Given the price I am paying today, what return am I actually getting?”
Yield to Maturity (YTM) goes one step further. It tells you the annualized return if:
- You buy the bond at today’s market price,
- Hold it till maturity, and
- Reinvest all interest payouts at the same rate.
Two quick thumb rules:
- Buy at a discount (below face value) → YTM is usually higher than the coupon.
- Buy at a premium (above face value) → YTM is lower than the coupon.
4. Clean Price vs Dirty Price
This part confuses almost everyone in the beginning. The Clean Price is the neat, quoted price you see on screen. The Dirty Price is what you actually pay, and it includes something called Accrued Interest.
Accrued interest is simply the interest that has built up from the last interest payment date till today. That interest actually belongs to the seller, not you. According to SEBI regulations, the buyer must compensate the seller for this period.
Dirty price = Clean price + Accrued interest.
In practice, this means the cash that leaves your bank account is slightly higher than the quoted clean price.