Fixed coupon bond definition
I decided to go east and learn the bond business. Everybody I knew was in the bond business so I supposed it could support one more single man.
F. Scott Fitzgerald, The Great Gatsby
This security type refers to a generic coupon-paying bond. Such securities are usually just referred to as bonds.
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 are occasionally 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 such as convexity and pull to par.
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.
Many bonds also have embedded options, allowing the issuer to call the bond and repay the capital earlier than the scheduled maturity date.
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
Bonds are set up as follows:
|1||Security ID||String||Identification code||AU000XCLWAP3|
|2||Name||String||Name of bond||CGL 3.25% 21 June 2039|
|3||Sector||String||Classification data||AUD BOND|
|4||Effective date||Date||Date at which record becomes effective||[Blank]
|5||Pricing function||String||Pricing function for bond||FT_BOND_ZERO_CURVE|
|6||Risk function||String||Generates any additional return associated with this asset class||[Blank]|
|7||Effective exposure for bond||Integer||A value of 1 indicates that the market value of this security equals its effective exposure.||1|
|8||Credit rating for bond||String||Credit rating for this security||AAA|
|9||Currency||String||Currency in which this security is denominated||AUD|
|10||Residual bucket||String||Name of returns category into which to write residual return||Any valid string; can be blank|
|11||Yield curve||String||Yield curve applicable to this security||AUD_CURVE|
|12||Start date for cash flows||Date||Date after which cash flows begin||1/1/2010|
|13||Maturity date of bond||Date||Date at which maturity payment occurs and final coupon payment is made||21/06/2039|
|14||Bond coupon||Float||Annual coupon payment for bond,||0.05|
|15||Coupon frequency||2||Number of coupons per year. Typically 1 or 2 for bonds, 4 for inflation-linked bonds||2|