In a cum-dividend bargain, how is the dirty price calculated?

In the context of fixed-income securities, the dirty price refers to the total price an investor pays for a bond, including any accrued interest that has accumulated since the last coupon payment. When calculating the dirty price in a cum-dividend transaction, the correct method involves adding the accrued interest to the clean price.

The clean price is the quoted price of the bond that does not account for any interest accrued since the last coupon payment. Therefore, to arrive at the dirty price, which represents the actual cost to the buyer to reflect the period for which they will receive interest, you must add the accrued interest to the clean price. This process ensures that the seller is compensated for the interest earned up until the sale of the bond, thus providing a fair transaction for both parties involved.

This approach recognizes that the holder of the bond has the right to receive interest for the period they held the bond, even if they are selling it before the next coupon payment. Hence, the dirty price captures the full economic value of the bond at the point of sale, accurately reflecting all owed amounts to the seller.