Question

Question) When estimating the dirty price of a bond, you must...

Multiple Choice Answers) Please answer and Explain!

a) Take the current price of a bond plus the accrued coupon payment

b) Take the current price of a bond plus the current yield.

c) Take the current yield plus the coupon payment divided by the quoted price.

d) Take the current price of a bond divided by the coupon payment.

Answer 1

a) Take the current price of a bond plus the accrued coupon payment.

The dirty price is sometimes called the price plus accrued.dirty price is the price of a bond including any interest that has accrued since issue of the most recent coupon payment.

As an example, let's say Co. A issued a bond with a $1,00 face value while $95 is the published price. The bond pays an interest rate—coupon rate—of 10% annually, and these payments are semiannual. As a result, investors would receive $5 every six months for holding the bond.

The price of $95 is the published price or the clean price. However, an investor looking to purchase the bond would receive a quote from a broker that includes the $95 plus any accrued interest. Depending on the day the investor made the purchase, the accrued interest would vary.

So, if the investor bought the bond a month before the first coupon payment of $5 it results in $ 4.166 of accrued interest up to that date. The investor's bond's price would be $99.166, or $95 plus $4.166 in accrued interest.