Final answer:
An investor pays the dirty price to purchase an outstanding bond, which includes the bond's face value plus any accrued interest. The dirty price reflects the bond’s present value in the market, which can change with varying interest rates. Option 1 is correct.
Step-by-step explanation:
The price that an investor pays to purchase an outstanding bond is known as the dirty price. The dirty price includes the face value of the bond plus any accrued interest since the last coupon payment. Bonds are financial instruments that represent a loan made by an investor to a borrower (typically a corporation or government). A bond includes the face value, which is the amount the borrower agrees to pay back at maturity, and the coupon rate, which is the interest paid to the investor at specified intervals. As market interest rates fluctuate, the present value of the bond changes, which can differ from the face value.