Baran

6、In the context of bonds, accrued interest:

A) applies only to bonds with semi-annual or quarterly coupon payments.
 
 
B) equals interest earned from the previous coupon to the sale date.
 
 
C) is discounted along with other cash flows to arrive at the dirty, or full price.
 
 
D) covers the part of the next coupon payment not earned by seller.

Baran

 The correct answer is B

This is a correct definition of accrued interest on bonds. The other choices are false. Accrued interest can occur on all bonds with periodic coupon payments, not just bonds with payment frequencies greater than one year. Accrued interest is not discounted when calculating the price of the bond. The statement, "covers the part of the next coupon payment not earned by seller," should read, "…not earned by buyer."

Baran

7、The dirty, or full, price of a bond:

A) applies if an issuer has defaulted.
 
 
B) is paid when a security trades ex-coupon.
 
 
C) equals the present value of all cash flows, plus accrued interest.
 
 
D) is usually less than the clean price.

Baran

 The correct answer is C

The dirty price of a bond equals the quoted price plus accrued interest. If an issuer has defaulted, the bond trades without interest and is said to trade flat. When a security trades ex-coupon, the buyer pays the clean price, which is the quoted price without accrued interest. The dirty price of a bond is greater than the clean price by the amount of the accrued interest. (If the bond trades on a coupon date, the dirty price will equal the clean price.)

Baran

8、Peter Stone is considering buying a $100 face value, semi-annual coupon bond with a quoted price of 105.19. His colleague points out that the bond is trading ex-coupon. Which of the following choices best represents what Stone will pay for the bond?

A) $105.19 plus accrued interest.
 
 
B) $105.19.
 
 
C) $105.19 minus accrued interest.
 
 
D) $105.19 minus the coupon payment.

Baran

 The correct answer is B

Since the bond is trading ex-coupon, the buyer will pay the seller the clean price, or the price without accrued interest. So, Stone will pay the quoted price. The choice $105.19 plus accrued interest represents the dirty price (also known as full price). This bond would be said to trade cum-coupon.

Baran

9、Austin Traynor is considering buying a $1,000 face value, semi-annual coupon bond with a quoted price of 104.75 and accrued interest since the last coupon of $33.50. If Traynor pays the dirty price, how much will the seller receive at the settlement date?

A) $1,081.00.
 
B) $1,047.50.
 
C) $1,014.00.
 
D) $1,033.50.

Baran

 The correct answer is A

The dirty price is equal to the agreed upon, or quoted price, plus interest accrued from the last coupon date. Here, the quoted price is 1,000 × 104.75%, or 1,000 × 1.0475 = 1,047.50. Thus, the dirty price = 1,047.50 + 33.50 = 1,081.00.

Baran

10、Scott Malooly recently paid 109.05 for a $1,000 face value, semi-annual coupon bond with a quoted price of 105.19. Assuming that transaction costs are zero, which of the following statements is most accurate?

A) The price Malooly paid covers the amount of the next coupon payment not earned by the seller.
 
B) The bond was trading ex-coupon. 
 
C) Malooly purchased the bond between coupon dates.
 
D) The price Malooly paid includes the discounted amount of accrued interest due to seller.

Baran

The correct answer is C

When a bond trades between two consecutive coupon dates, the seller is entitled to receive interest earned from the previous coupon date until the date of the sale. The price paid includes accrued interest and is referred to as the “dirty price.”

The other statements are false. The price Malooly paid includes the amount of the next coupon payment that he, the buyer, has not earned. When a security trades ex-coupon, the buyer pays the clean price, which is the quoted price without accrued interest. Accrued interest is not discounted when calculating the dirty price of a bond.