Answer: is equal to a bond's full price minus its flat price.

## Explanation **Correct Answer: B** Accrued interest is indeed equal to a bond's full price (also called dirty price) minus its flat price (also called clean price). This relationship is fundamental in bond pricing: **Full Price (Dirty Price) = Flat Price (Clean Price) + Accrued Interest** Therefore: **Accrued Interest = Full Price - Flat Price** **Why the other options are incorrect:** **A. depends on a bond's yield-to-maturity.** - **Incorrect.** Accrued interest does NOT depend on yield-to-maturity. Accrued interest is calculated based on: - The coupon rate - The number of days since the last coupon payment - The day count convention (e.g., 30/360, actual/actual) - The coupon frequency Yield-to-maturity affects the bond's price, but not the accrued interest calculation. **C. is typically included in the price quoted by bond dealers.** - **Incorrect.** Bond dealers typically quote the **flat price** (clean price), not the full price (dirty price). The accrued interest is added separately when settling the transaction. This is standard practice in bond markets because: 1. It makes price comparisons easier (accrued interest changes daily) 2. It separates the interest component from the principal value 3. It allows for clearer analysis of price movements **Key Concepts:** - **Flat Price (Clean Price)**: The quoted price of a bond, excluding accrued interest - **Full Price (Dirty Price)**: The actual amount paid by the buyer, including accrued interest - **Accrued Interest**: Interest earned but not yet paid since the last coupon payment **Calculation Example:** If a bond has a flat price of $980 and accrued interest of $15, the full price would be $995. The buyer pays $995, receives the next coupon payment, and effectively earns interest for the period they held the bond.

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