Fixed coupon bond definition

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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

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 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:

Field number Field Type Description Samples
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]

01/01/2010

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


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