okay so this just happened and I am confused. looked up an NCD on BondScanner, face value Rs 10,000, clean price was Rs 10,000. added to cart, went to payment, and the final amount was Rs 10,340. no charges, no fees. just Rs 340 extra with a line saying accrued interest. what is this and am I getting charged correctly?
You are being charged correctly. The Rs 340 is accrued interest, which is the interest that has accumulated on the bond since its last coupon payment date. Even though the bond pays coupons on specific dates, say every six months, the interest technically accrues every single day. When you buy mid-period, you are stepping into a bond that has already earned some interest for the seller. You compensate them for the days they held it. On the next coupon date you receive the full coupon, which more than covers the Rs 340 you paid upfront.
so I pay the seller Rs 340 now, and then when the next coupon comes I get the full coupon amount which includes that Rs 340 back?
Exactly. Say the bond pays Rs 500 as semi-annual coupon. If 41 days have passed since the last coupon out of a 182-day period, the accrued interest is roughly Rs 500 multiplied by 41 divided by 182 which is around Rs 113. You pay that Rs 113 to the seller now. On coupon day you receive the full Rs 500. Your net interest income is Rs 387, covering only the days you actually held the bond. The seller gets Rs 113 for the 41 days they held it. Everyone gets paid proportionally for the days they owned it.