Question

Is the following statement true or false:

All else being equal, dirty bond prices will increase from the prior days dirty price on most days the bond is trading.

Answer 1

The given statement is true.

All else being equal, dirty bond prices will increase from the prior days dirty price on most days the bond is trading.

This is true as the dirty bond price includes the accrued interest to be paid on the bond and the face value on the bond.

Accrued interest here means the accumulated interest to be paid up to the date. For example- a bond has face value of $ 1000 which provides 10 % interest annually. Annual interest rate will be $ 100. If you want to check dirty price of the bond after 6 months, accrued interest after 6 months will be $ 50. Accrued interest after 9 months will be $75.

Hence the accrued interest will keep on increasing till the coupon rate is paid. Hence the dirty bond price will increase from prior day price.

Hope it clarifies !