Scott Malooly recently paid $109.05 for a $1000 face value, semi-annual coupon bond with a quoted price of 105 6/32. Assuming that transaction costs are zero, which of the following statements is TRUE?
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A. B. C. D.A
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 covers the amount of the next coupon payment not earned by the buyer. 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.