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FixedRateCoupon question

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Slava Mazur

FixedRateCoupon question

Greetings,

I’m new to QuantLib, so if my question has already been discussed please point me to the answer.

I noticed that the amount of a fixed rate coupon bond is always calculated using day count convention for such a bond

(see FixedRateCoupon::amount() function for details). In reality however, many bond contracts are set up in such a way that the issuer of the bond doesn’t care about how many days passed since the previous coupon payment. For example, 10% semi-annual would pay $5 per $100 no matter what, so the cash flow amount is $5 for each coupon. In QuanLib however, the function that calculates coupon amount would give the result that slightly deviates from $5 depending on day count convention and a calendar.

And here is my question. Is there any way to setup a bond pricer in such a way that cash flows from coupons would be fixed (and equal to nominal / coupon frequency) and day count conventions would affect only calculation of discount factors?

Thanks,

Slava

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JURAJ HUSKA

Re: FixedRateCoupon question

Hi,

just a quick attempt (I had the same problem before)-if you use ISMA daycounter it should always give you 5(unless the coupon period is drastically shorter than 6 months).

Juraj

On Mon, Jun 2, 2008 at 11:05 AM, Slava Mazur <[hidden email]> wrote:

Greetings,

I'm new to QuantLib, so if my question has already been discussed please point me to the answer.

I noticed that the amount of a fixed rate coupon bond is always calculated using day count convention for such a bond

(see FixedRateCoupon::amount() function for details). In reality however, many bond contracts are set up in such a way that the issuer of the bond doesn't care about how many days passed since the previous coupon payment. For example, 10% semi-annual would pay $5 per $100 no matter what, so the cash flow amount is $5 for each coupon. In QuanLib however, the function that calculates coupon amount would give the result that slightly deviates from $5 depending on day count convention and a calendar.

And here is my question. Is there any way to setup a bond pricer in such a way that cash flows from coupons would be fixed (and equal to nominal / coupon frequency) and day count conventions would affect only calculation of discount factors?

Thanks,

Slava

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Allen Kuo-2

Re: FixedRateCoupon question

In reply to this post by Slava Mazur

Hi: I've used ActualActual(ActualActual::Bond) in the FixedRateBond constructor to get constant cash flows. I believe the DayCounter which you set in the YieldTermStructure (passed in to DiscountingBondEngine) is the one used to calculate the discount factors to those cash flows. Allen

--- On Mon, 6/2/08, Slava Mazur <[hidden email]> wrote:

From: Slava Mazur <[hidden email]>
Subject: [Quantlib-users] FixedRateCoupon question
To: [hidden email]
Date: Monday, June 2, 2008, 12:05 PM

Greetings,

I’m new to QuantLib, so if my question has already been discussed please point me to the answer.

I noticed that the amount of a fixed rate coupon bond is always calculated using day count convention for such a bond

(see FixedRateCoupon::amount() function for details). In reality however, many bond contracts are set up in such a way that the issuer of the bond doesn’t care about how many days passed since the previous coupon payment. For example, 10% semi-annual would pay $5 per $100 no matter what, so the cash flow amount is $5 for each coupon. In QuanLib however, the function that calculates coupon amount would give the result that slightly deviates from $5 depending on day count convention and a calendar.

And here is my question. Is there any way to setup a bond pricer in such a way that cash flows from coupons would be fixed (and equal to nominal / coupon frequency) and day count conventions would affect only calculation of discount factors?

Thanks,

Slava
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Piter Dias-3

Re: FixedRateCoupon question

In reply to this post by Slava Mazur

Allen,

I had this issue while developing TestSuite for a Brazilian Bond. You can
check "void BondTest::testBrazilianCached()" the way I solved this.

If you change
couponRates[0] = InterestRate(0.1,Thirty360(),Compounded,Annual);
// gives you 4,880885% per semester

to

couponRates[0] = InterestRate(0.1,Thirty360(),Simple,Annual);
// gives you 5% per semester.

You would have the result you want.

There are simpler ways to that for for Simple rates (it wasn`t my case) but
you can get more complex schedules with this approach.

Regards,

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Luigi Ballabio

Re: FixedRateCoupon question

In reply to this post by Slava Mazur

On Mon, 2008-06-02 at 12:05 -0400, Slava Mazur wrote:
> And here is my question. Is there any way to setup a bond pricer in
> such a way that cash flows from coupons would be fixed (and equal to
> nominal / coupon frequency) and day count conventions would affect
> only calculation of discount factors?

You can choose the day counters independently. As already suggested,
choosing ActualActual(ActualActual::Bond) when building the bond will
give you fixed cash flows; the day counter passed to the yield curve
will be used for discount factors.

Luigi

--

So little done, so much to do.
-- Cecil Rhodes

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