The prices for bonds are quoted in clean price(without accrued interest rate) but settled in dirty price (with interest rate). How do i know the ultimate price I will pay to buy a bond?
The price you pay for the bond would be the future price.
While calculating the future price you actually deduct the interest bit.
Future Price = Dirty Price - Income from Cash Position+ Financing cost
As you know, Dirty Price = Clean Price + Accrued Interest.
Clean Price on NSE is calculated as the Wt Avg of the last 2 hours of trading on a daily basis.
You can find more information here - http://www.nseindia.com/products/content/derivatives/irf/IRF_Brochure_new.pdf
Karthik, Is it applicable to corporate bonds as well? I think there is no futures market for corporate bonds !
Its applicable to the Govt of India interest rate futures which are traded on NSE. As far as I know there is no market for corporate bonds. Most of the corporate bonds are placed Over the Counter (OTC).