Use

The market price calculator for bonds calculates current market values, time values, and future market values (the future point in time is the horizon).

Fixed interest bonds, zero bonds, and floaters can be established and valued as either standard or foreign currency bonds (with up to two foreign currencies: one for interest and another for principal payments). Both fixed and variable agreements can be created (for example fixed interest bonds; variable interest floaters). Interest rate agreements in which interest rates are linked formulae can also be used to some extent. The formula must be in the form V 1*V 2+V 3*V 4 (where V i is a fixed or variable interest rate). You can also work with fixed or variable interest rate floors and caps. For valuation, the interest rates which go above or below the agreed interest rate limit are replaced with the values of that limit.

Integration / Calculation Basis

Depending on the Customizing settings, two types of valuation of spot security transactions are possible.

The NPV is the market price of the bond

The NPV is the theoretical price of the bond

The theoretical price of the bond is always used for valuing bonds in value-at-risk analyses.

Zero bond discounting factors are needed as further input parameters in order to discount the cash flow. The zero and par coupon calculation methods can be used to define the zero bond discounting factors.

If the transaction currency differs from the display currency of the bond, the transaction currency is changed into the display currency using the currency rate from the horizon. If the horizon is later than the evaluation date, the corresponding forward currency rate (bid or ask price) is calculated for the evaluation date using the yield curves from the transaction and display currencies.

The following procedures are used to calculate the input parameters:

Interpolation

Forward Rates

Zero Bond Discounting Factors

Accrued Interest

Business calendar

The system now calculates the time interval between the evaluation date and the date of the bond price in business days. Until now, calculations have been based on the time interval between the evaluation date and the date of the bond price in actual days, independent of any business calendar. This use of calendar logic enables you to determine the maximum age of the security price.

Scope of Functions / Valuation

For risk analysis, bonds are bundled together and valued as positions.

Security positions can be valued in two ways:

The NPV is the market price of the bond:

The NPV is calculated as the sum of the nominal volume of the security position multiplied by the current price of the bond, and the accrued interest up to the horizon. The exchange rate is used to convert to the display currency.

The valuation of the market price of the bond can occur only under the following conditions:

Horizon = evaluation date

An exchange rate exists for the bond.

The price of the bond is not older than the maximum age specified in the evaluation type.

Valuation of the security using its cash flow is not activated. This is specified in the valuation rule settings for the evaluation type in securities control.

In all other cases, the NPV of the bond is calculated by using the theoretical price.

The following abbreviations/definitions are used:

( )

The NPV is the theoretical price of the bond:

In the first step, the cash flow is reduced to those flows which have due dates later than the horizon. For security positions with variable interest rates, the forward reference interest rates are also calculated. For interest rate agreements whose fixed and variable interest rates are tied to formulae, the amount of the resulting interest rates is calculated using the calculated forward rates (possibly taking interest floors and caps into consideration). The calculated interest payments are put into the cash flow, which only contains flows whose size and payment date are certain. The cash flows are then standardized according to the nominal volume of the security position. Depending on the method of calculation (par or zero coupon method), the NPV of the individual cash flows is calculated for the horizon, using the yield curve of the transaction currency. The value of the security position (in the display currency) is the NPV of the sum of the cash flows. These cash flows are standardized to the nominal volume of the position, and converted to the display currency using the appropriate (forward) exchange rate.

The following abbreviations/definitions are used:

( )