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FRM Part I · FRM Exam Part I · Pricing Conventions, Discounting, and Arbitrage

An investor buys bonds with face value 1,000,000 at a quoted (clean) price of 101.25 per 100. Accrued interest at settlement is 1.15 per 100. How much cash does the investor pay at settlement?

The investor pays 1,024,000. The cash settlement amount is the dirty price, equal to the clean quote of 101.25 plus accrued interest of 1.15, giving 102.40 per 100 of face value. Applied to 1,000,000 face, this exceeds the clean-price amount by the accrued interest.

  1. A1,001,000
  2. B1,012,500
  3. C1,024,000Correct
  4. D1,036,500

Explanation

The buyer pays the dirty (invoice) price, which is clean price plus accrued interest: 101.25 + 1.15 = 102.40 per 100. On 1,000,000 face this is 1,024,000. Paying only the clean price (1,012,500) ignores the accrued interest owed to the seller.

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