Bonds Shaw

8/17/2019 Bonds Shaw

1/19

The D. E. Shaw Group

Bonds


2/19


Definitions of bonds

Types of bonds

Important attributes of bonds

PNL calculation

CODA treatment of bonds

Useful Bloomberg Functions

Agenda


3/19


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


4/19


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?


5/19


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)


6/19


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


7/19


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?


8/19


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


9/19


Bond Valuation

http://localhost/var/www/apps/conversion/tmp/scratch_3/bondvaluation.xls


10/19


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


11/19


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


12/19


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


13/19


Misc

Corporate actions

• Redemptions• Conversions• Special coupons

Defaulted bonds

Cross currency bond trades


14/19


Bond Example


15/19


Example (SXT)


16/19


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


17/19


Historical Price


18/19


LIBOR Fixings

h Sh G


19/19


Questions?

Documents

Bonds Shaw