What is the dirty price for an ex-dividend bargain?

What is the dirty price for an ex-dividend bargain?

• A. Clean price + accrued interest
• B. Clean price - accrued interest
• C. Annual coupon / market price
• D. Market price - clean price

Answer: (B)

The dirty price of a bond refers to the total price an investor pays, including both the clean price (the price of the bond excluding any accrued interest) and any accrued interest that has accumulated since the last interest payment. In the context of an ex-dividend transaction, the buyer of a bond after the ex-dividend date will not receive the upcoming coupon payment, which is why the price reflects the absence of that accrued interest. When considering an ex-dividend bargain, the correct calculation for the dirty price would involve the clean price minus accrued interest. This means that the investor pays a lower amount to account for the fact that they will not receive the next coupon payment. Hence, the assertion is that the dirty price is calculated as the clean price reduced by the amount of accrued interest. This aligns with the principles of bond pricing and reflects the adjustments made for the ex-dividend situation.

The dirty price of a bond refers to the total price an investor pays, including both the clean price (the price of the bond excluding any accrued interest) and any accrued interest that has accumulated since the last interest payment. In the context of an ex-dividend transaction, the buyer of a bond after the ex-dividend date will not receive the upcoming coupon payment, which is why the price reflects the absence of that accrued interest.

When considering an ex-dividend bargain, the correct calculation for the dirty price would involve the clean price minus accrued interest. This means that the investor pays a lower amount to account for the fact that they will not receive the next coupon payment.

Hence, the assertion is that the dirty price is calculated as the clean price reduced by the amount of accrued interest. This aligns with the principles of bond pricing and reflects the adjustments made for the ex-dividend situation.