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Fixed rate bond valuation in final coupon period using simple interest

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igitur

Mar 29, 2017; 7:56am

Fixed rate bond valuation in final coupon period using simple interest

131 posts

Hi all,

In the final coupon period (e.g. 2 months before redemption), our South African bonds work similar to the method described here: http://help.derivativepricing.com/1283.htm

I'll quote it too:

"In some markets (such as the US and Germany), bond yields during the final coupon period are calculated on a simple interest basis rather than using compound interest. When only one payment is outstanding, the appropriate formula for bond price (PPH) is:

P = dirty price (clean price plus accrued interest) of the bond per 100 units face value.
ym = annual money market yield (simple interest)
c = annual percentage coupon rate
h = number of coupon periods in a year
d = number of days to redemption (using an "Actual" day count convention)
a = number of days in a year (using appropriate day count convention)
"

So in QuantLib, when I calculate a dirty price using FixedRateBond, is there a way that this is handled automatically? I suspect this is not the case and that I myself would have to check whether the bond is in the last coupon period and set the compounding to simple interest and leave other longer bonds to compounded interest.

thanks

Francois Botha

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Luigi Ballabio

Mar 29, 2017; 8:09am

Re: Fixed rate bond valuation in final coupon period using simple interest

3579 posts

No, I think we don't have any code in there to manage this automatically.

Luigi

On Wed, Mar 29, 2017 at 9:59 AM Francois Botha <[hidden email]> wrote:

Hi all,

In the final coupon period (e.g. 2 months before redemption), our South African bonds work similar to the method described here: http://help.derivativepricing.com/1283.htm

I'll quote it too:

"In some markets (such as the US and Germany), bond yields during the final coupon period are calculated on a simple interest basis rather than using compound interest. When only one payment is outstanding, the appropriate formula for bond price (PPH) is:

P = dirty price (clean price plus accrued interest) of the bond per 100 units face value.
ym = annual money market yield (simple interest)
c = annual percentage coupon rate
h = number of coupon periods in a year
d = number of days to redemption (using an "Actual" day count convention)
a = number of days in a year (using appropriate day count convention)
"

So in QuantLib, when I calculate a dirty price using FixedRateBond, is there a way that this is handled automatically? I suspect this is not the case and that I myself would have to check whether the bond is in the last coupon period and set the compounding to simple interest and leave other longer bonds to compounded interest.

thanks
Francois Botha

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