Bonds Shaw
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Transcript of Bonds Shaw
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8/17/2019 Bonds Shaw
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The D. E. Shaw Group
Bonds
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The D. E. Shaw Group
Definitions of bonds
Types of bonds
Important attributes of bonds
PNL calculation
CODA treatment of bonds
Useful Bloomberg Functions
Agenda
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The D. E. Shaw Group
Bond Definition
A debt instrument in which a certificate is issued by a
borrower/issuer (typically a Government or a Corporation)
to a lender in which the issuer promises to repay the
principal plus any interest upon maturity
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Some Examples of a Bond
US Treasuries/Sovereigns/T-billsIssuers: Federal Governments and any Government-run agencies (FannieMae, Sallie Mae, Ginne Mae, etc.)
Corporate bonds: Issued by corporations to raise funds for a particularinvestment (Ex: machinery)
Convertible bonds: Issued by corporations that can be converted into stockABS: Bond issued mainly by corporations on a pool of assetsMBS: type of ABS issued by banks on mortgage pools
Why invest in ABS/MBS?
Municipal: Issued by state, city or local government agencies to raise fundsfor their respective interests
Commercial Paper: Unsecured money market security issued by banks andcorporations to finance short-term investmentsCorporate Bonds vs Commercial Paper – term, listed/secured, returns?
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The D. E. Shaw Group
Life cycle of an instrument in the firm
•Instrument Set Up (Attributes, etc) (Middle-Office)
• Trade Managemento Booking (Trading desk, MO, TAO)o Reconciliation, Settlement and Accounting (TAO)
• Valuation (Pricing)
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Attributes of a Bond
Notional: The amount over which the issuer pays interestPrice (clean vs. dirty):
– Clean price does not include accrued interest (quoted price at the time of the trade) – Dirty price includes accrued interest
Coupon: – Fixed Coupon: pre-determined percentage of the notional to be paid out by
borrower/issuer at pre-set dates – Floating Coupon: percentage of notional tied to a market rate (LIBOR, EURIBOR,
etc.) to be paid out by borrower/issuer at pre-set datesIdentifier: CUSIPS/ISIN’s First settle date: date at which the bond settles for the first timeFirst coupon date: date at which the issuer/borrower pays the lender for the first timeDay count conventions:
– 30/360: Assumes 360 days in a year and every month to have 30 days – ACT/360: Assumes 360 days in a year and actual number of days in the coupon
period – ACT/365: Assumes 365 days in a year and actual number of days in the coupon
period – ACT/ACT: Assumption based on other factors
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The D. E. Shaw Group
Attributes of a Bond (continued)
•Coupon frequency: number of times a borrower/issuer pays coupon in ayear
•Clearing: DTC, Euroclear, Fed, etc.
•Secured vs. Unsecured bonds:
– Secured: Bonds backed by an underlying asset (Ex: MBS) – Unsecured: Bonds not backed by any asset. These tend to be riskier.
(Ex: Commercial Paper)
• Yield to Maturity (YTM)vs coupon rate?
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Bond Rating
A grade given to Bonds that indicates their credit quality. Private independent ratingservices such as Standard & Poor’s, Moody’s and Fitch provide these evaluations ofa bond issuer’s financial strength, or it’s ability to pay a bond’s principal andinterest in a timely fashion.
To illustrate the bond ratings and their meaning, we’ll use the Standard & Poor’sformat:
•A and BBB: Medium credit-quality investment grade.
•BB, B, CCC, CC, C: Low credit-quality (non- investment grade), or “junk bonds”
•D: Bonds in default for non-payment of principal and/or interest
http://localhost/var/www/apps/conversion/tmp/scratch_3/Bond_Yield_Matrix.xls
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Bond Valuation
http://localhost/var/www/apps/conversion/tmp/scratch_3/bondvaluation.xls
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PNL Calculation
MTM Calculation: Change in priceInterest Calculation:
Notional: 2mmCoupon: 5%Coupon Frequency: S/A or 2Day count convention: ACT/3652mm * 5% = 100,000 (annual coupon )Pays on 11/24/06 and 5/24/07
• Number of days between these dates = 181• Number of days in a year = 365• Semi-annual settlement: 100,000 / 365 * 181 = 49,589.04
Next payment on 11/24/2007:• Number of days between 11/24/07 and 5/24/07 = 184• Number of days in a year = 365• Semi-annual settlement: 100,000 / 365 * 184 = 50,410.96
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CODA: Accounting treatment
Balance SheetCashSecurities Owned (MV)Purchased AI
Income StatementMTM pnlInterest Income/Expense
Example:Buy 10,000,000 T-bondsPurchased AI: 100,000Net cash settlement: -10,100,000MTM PNL: -50,000
AI: +10,000Entry in Coda:
• Cash (BS): -10,100,000 vs. Securities Owned (BS): +10,000,000 and Purchased AI (BS):+100,000
• MTM PNL (IS): +50,000 vs. Securities Owned (BS): -50,000• Accrued Interest (BS): +10,000 vs. Interest Income (IS): -10,000
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CODA: Transactions & Journal Entries contd..
TRADE & ACCRUED INTERESTOnHand -10,100,000 ….BS Long Market Value +10,000,000 ….BS PurchasedAccruedInterestExpense +100,000 ….IS
ChgUnrealizedPriceGL 50,000 ….IS Long Market Value -50,000 …. BS
ChangeInAccruedInterestReceipt -10,000 ….IS AI Long Market Value 10,000 ….BS
COUPONSInterest ReceiptOnHand
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Misc
Corporate actions
• Redemptions• Conversions• Special coupons
Defaulted bonds
Cross currency bond trades
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Bond Example
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Example (SXT)
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Useful Bloomberg Functions
• BXT/SXT – Allows you to calculate net settlement
amount on a bond
• BBAM – Provides current LIBOR fixings
• HP – Historical price of an instrument
• CSHF – Cash flows/Coupons on the bonds
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Historical Price
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LIBOR Fixings
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Questions?