A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

Question

Quizplus · Accepted Answer

Since the last interest payment was made on August 1, the bond has accrued interest for two months (August and September), which the buyer would have to pay the seller if they purchased the bond on October 1 (i.e. the buyer would pay the seller the dirty price, which includes accrued interest). Therefore, the difference between the clean price (without accrued interest) and the dirty price (with accrued interest) would be two months' interest.

A Six-Year, $1,000 Face Value Bond Issued by Taylor Tools