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 default pricing function FT_BOND_ZERO_CURVE.
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 | 0.54 |
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 | February 15, 2017 | AAA |
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 |
|---|---|---|---|---|---|---|---|---|
March 12, 2010 | STF1 | AU300TB01208 | 0.0422 | 0.0001232 | 0.0001232 | |||
April 12, 2010 | STF1 | AU300TB01208 | 0.0422 | 0.0001232 | 0.0001232 | |||
May 12, 2010 | STF1 | AU300TB01208 | 0.0426 | 0.000128 | 0.000128 | |||
0 | 0 | 0 |
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 | March 20, 2015 | AA | 0.09 | 2 | |
US00000MEGA | MEGACORP 9.75% 20-MAR-2015 | June 15, 2006 | BOND | USD | USD_CURVE | March 20, 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