Explanation:
Both the definitions of clean and dirty prices provided by Lucy Anderson are incorrect. The clean price of a Treasury bond is the quoted price, not the sum of the quoted price and the accrued interest. It can also be calculated as the dirty price minus the accrued interest since the last coupon date. On the other hand, the dirty price of a Treasury bond is the sum of the quoted price and the accrued interest, not the clean price minus the accrued interest. The dirty price is the total amount that a buyer pays to the seller, including the price of the bond and the interest that has accrued since the last coupon payment. Therefore, both statements made by Anderson are inconsistent with the standard definitions of clean and dirty prices in the context of Treasury bonds.
Choice A is incorrect. The definition of the clean price is indeed incorrect, but this choice does not account for the fact that the definition of dirty price is also incorrect. The clean price of a bond does not include accrued interest; it refers to the price of a bond excluding any interest that has accrued since issue or last coupon payment.
Choice B is incorrect. While it's true that Anderson's definition of dirty price is wrong, this option doesn't acknowledge her erroneous explanation about clean prices. Dirty prices do include accrued interest, contrary to what Anderson stated.
Choice D is incorrect. Both definitions provided by Anderson are inconsistent with standard definitions in finance literature and practice. Therefore, it cannot be said that none of the definitions are incorrect.
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Q.689 Lucy Anderson is working for one of Canada's largest investment banks, where she is responsible for the training of a new batch of fixed-income investment analysts. During the training session on the subject of Treasury bills and Treasury bonds, she made the following two statements regarding the price of Treasury bonds:
I. The clean price of the bond includes the quoted price plus the accrued interest on that bond, which is why sellers of the bond prefer clean price quotes. II. The dirty price of the bond is equal to the clean price minus accrued interests. The dirty price is also considered as equal to the quoted price. Since it doesn't pay accrued interest to the seller of the bond, it is regarded as a dirty price.
Which of Anderson's statements is/are inconsistent with the definition of clean price and dirty price?
A
The definition of the clean price is incorrect.
B
The definition of the dirty price is incorrect.
C
Both clean and dirty price definitions are incorrect.
D
None of the definitions are incorrect.