Fixed coupon bond

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Contents

Introduction

This security type refers to a generic coupon-paying bond. Such securities are usually just referred to as bonds.

Security description

A fixed coupon bond is a security that pays regular, fixed coupons at predetermined intervals up to and including the bond’s maturity date, at which time it also repays its principal. Coupon payments are typically made annually or semi-annually, although other payment frequencies have been used.

The return of a bond is driven by accrued interest and the passage of time, by changes in the level of the yield curve, by changes in credit spread, and by a number of other smaller effects.

Some bonds have a non-standard first or last coupon. For instance, the usual interval between coupons may be a year, but for issuance reasons the time between the bond’s issuance and the first coupon payment may be set up to be more or less than a year. Although this changes the pricing and accrued interest calculations during this period, the returns of the bond are largely unaffected by such features, so they are ignored for attribution purposes.

Security code

Bonds have security type BOND.

Calculation of returns

Bonds are priced as the sum of the various discounted cash flows generated by the security. Because coupon-paying bonds are ubiquitous within the fixed income markets, FIA provides specialised internal routines to price these securities to a very high degree of accuracy, using the relevant yield curve.

Security file setup

A bond is set up as follows:

Field number Field Type Description Sample
1 Security ID String Identification code AU0000IFXHB8
2 Name String Name of bond IFC 5.750 24-Jun-2014
3 Start date Date Date at which record becomes effective [Blank]

01/01/2010

4 Security type String Type code for bond (BOND) BOND
5 Currency String 3-character currency code AUD
6 Yield curve String Yield curve applicable to this security AUD_CURVE
7 Maturity Date Maturity date of bond 23/06/2014
8 Credit rating String Credit rating of bank bill AAA
9 Coupon Double Nominal coupon 0.0575
10 Frequency Integer Number of coupons per year 2

Returns file setup

A bond requires the following information in the returns file:

Field number Field Type Description Sample
1 Date Date Date at end of interval 30/11/2009
2 Portfolio String Name of portfolio STF1
3 Security ID String Identifier for security AU0000IFXHB8
4 Market weight Double Market weight of security within portfolio 0.04553
5 Base currency return Double Base currency return of security 0.00293
6 Local currency return Double Local currency return of security 0.00293

In addition, information on the bond's yield to maturity, modified duration and convexity can also be supplied. If provided, they will be used in all subsequent attribution calculations. If not supplied, FIA will calculate its own values for these quantities using the supplied security parameters and market data.

Field number Field Type Description Sample
7 Yield to maturity Double Yield to maturity at end of current interval 0.0454
8 Modified duration Double Modified duration at end of current interval 0.540
9 Convexity Double Convexity at end of current interval 1.22

Example 1

A bond is issued in AUD with a 6% coupon, maturity date 15th February 2017, paying two coupons per year. The bond has a AAA credit rating and is priced off the AUD_CURVE yield curve.

This security is represented by a single entry in the security definition file:

Security ID Name Start date Security type Currency Yield curve Maturity Credit rating
AU300TB01208 CGL 6% 15/02/2017 BOND AUD AUD_CURVE 15/02/2017 AAA 0.06 2

The Start date field is left blank, indicating that all supplied characteristics remain unchanged during the bill's lifetime.

The security has the corresponding entries in the returns file:

Date Portfolio Security ID Market weight Base currency return Local currency return YTM MD C
3/12/2010 STF1 AU300TB01208 0.0422 0.0001232 0.0001232
4/12/2010 STF1 AU300TB01208 0.0422 0.0001232 0.0001232
5/12/2010 STF1 AU300TB01208 0.0426 0.000128 0.000128
...

These records show the weight and returns of the bill over successive days within the STF1 portfolio.

Example 2

A bond is issued in USD with a 9% coupon, maturity date 20th March 2015, two coupons per year, and is priced off the AUD_CURVE yield curve. At issue, the bond was assigned a AA credit rating but was downgraded to AA- on 15th June 2006. This security is represented by two entries in the security definition file:

Security ID Name Start date Security type Currency Yield curve Maturity Credit rating Coupon Coupon frequency
US00000MEGA MEGACORP 9.75% 20-MAR-2015 BOND USD USD_CURVE 20/03/2015 AA 0.09 2
US00000MEGA MEGACORP 9.75% 20-MAR-2015 15/06/2006 BOND USD USD_CURVE 20/03/2015 AA- 0.09 2

Both rows are identical except for the entries in the Start date and Credit rating column.

Any of the entries apart from the ID code may be changed during the bond’s lifetime, including security type and currency.

See also

Security type PERTURBATIONAL_BOND


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