RE: Problem within the Bond YieldSolver class...

Posted by Toyin Akin on
URL: http://quantlib.414.s1.nabble.com/Problem-within-the-Bond-YieldSolver-class-tp4278p4282.html

One other thing to make this a bit clearer...

When I say "it does not reprice the bond correctly", I do the following...

Use the Bond's yield() function to imply out the yield.

Then construct a new bond object with exactly the same parameters as the
first, but this time pass in a flat Yieldcurve with the implied yield value.
you do not get the same dirty price once you have PV-ed the second bond.

Toy out.

>From: "Toyin Akin" <[hidden email]>
>To: [hidden email]
>CC: [hidden email]
>Subject: [Quantlib-users] Problem within the Bond YieldSolver class...
>Date: Tue, 06 Dec 2005 18:27:50 +0000
>
>Hi,
>
>Okay, after playing around a bit within the Bond classes, there can be
>situations where the implied Yield will not reprice the bond exactly
>(yield() function of the Bond class). This is because there is a minor
>difference between the implementation between the computation of the dirty
>price within the YieldSolver (dirtyPriceFromYield() function) and the
>performCalculation class of the Bond class.
>
>Basically it's the way accrual periods are computed when the datedDate is
>before the SettleDate
>for the first cashflow.
>
>Within the dirtyPriceFromYield() function, for the first cashflow period,
>the call eventually ends up calling yearFraction, passing all four date
>parameters (ie - does not default the last 2 date parameters).
>
>However within the performCalculation() function of the Bond class, within
>the call to discount(), the yearfraction is computed in a similar way to
>the yearFraction function, but without the use of the last 2 date
>parameters. Thus the coverage computed, especially in the presence of
>accrual periods are different.
>
>In my local copy, I thought about changing the code within the
>performCalculation() function so that for the first accrual period, I
>compute a 'Time' variable instead of using the 'Date' variable and then
>passing this to the discount() function. The Time variable would have been
>produced using all four date parameters of the yearFraction() function,
>however this does not work as this accrual period is priced correctly, but
>the next period is not as the 'Time' parameter implied within the
>discount() function is really the sum of the first 'incorrect' (for the
>lack of a better word) accrual period + the the following periods.
>
>The dirtyPriceFromYield() function is a little smarter in that basically it
>computes the accrual period for the first coshflow and then works out the
>accural period for the next period and adds this to the first period
>(indirectly that is via the multiplication of the discount factors...).
>
>I've included a little graphic of the inputs that I have used within the
>FixedCouponBond function.
>
>I've also included my own solution within a text file which is consistent
>with the code within the YieldSolver class ( more specifically the
>dirtyPriceFromYield() function ).
>
>Sorry about the waffle...
>
>Toy out.
>

><< BondGraphic.gif >>


><< BondCode.txt >>