# MISC Questions

oh > A \$1000 par semi-annual pay bond is trading for > 89.14, has a coupon rate of 8.75% and has accrued > interst of \$43.72. The clean price of the bond > is: > 847.69 > 891.40 > 935.12 > 10000 > > The answer being B. I don’t get it. It’s the clean > price the normal price of the bond less accrued > interest so why isn’t it 891.4-43.72? (which is > what i put) > In the US bonds are quoted clean.

The first question has been addressed in another thread. The second question is asking what the chance is of getting an observation less than or equal to two standard deviations below the mean. The z-table reveals the answer of approximately 2.3%. The third question is somewhat tricky. The convention is that bonds are quoted clean, so accrued interest is not part of the bond price. Thus, it does not need to be deducted to get the clean price. The stated bond price is the clean price. If they asked for the full or “dirty” price, you would add the accrued interest.

i think i had read somewhere that bond price quotes are clean price quotes i.e. they do not consider accrued interest when quoted…

An aside here - even ten years ago, there was nobody who took these exams who hadn’t bought and sold bonds before. Every time I read these comments like “I read somewhere that bonds are quoted clean” I always think “Haven’t you looked at the friggin invoice?”

I’ve never bought or sold a bond before. i work purely in equities. Before studying for this exam I didn’t know much about them. i don’t think that unusual.

It’s not unusual now.

For question B; the 95% with 2 SD’s sound good. But if we are only looking at him loosing money then we are only concerned bout the left tail arnt we? so it should be 5%?

Bsivia: The 5% represents both tails. The loss tail would only be half of that, which would be 5% divided by 2, hence 2.5%.