Documentation

fixedbyzero

Price fixed-rate note from set of zero curves

Description

example

[Price,DirtyPrice,CFlowAmounts,CFlowDates] = fixedbyzero(RateSpec,CouponRate,Settle,Maturity) prices a fixed-rate note from a set of zero curves.

example

[Price,DirtyPrice,CFlowAmounts,CFlowDates] = fixedbyzero(___,Name,Value) adds additional name-value pair arguments.

Examples

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This example shows how to price a 4% fixed-rate note using a set of zero curves by loading the file deriv.mat, which provides ZeroRateSpec, the interest-rate term structure needed to price the note.

CouponRate = 0.04;
Settle = '01-Jan-2000';
Maturity = '01-Jan-2003';

Price = fixedbyzero(ZeroRateSpec, CouponRate, Settle, Maturity)
Price = 98.7159

Assume that a financial institution has an existing swap with three years left to maturity where they are receiving 5% per year in yen and paying 8% per year in USD. The reset frequency for the swap is annual, the principals for the two legs are 1200 million yen and \$10 million USD, and both term structures are flat.

Settle = datenum('15-Aug-2015');
Maturity = datenum('15-Aug-2018');
Reset = 1;

r_d = .09;
r_f = .04;

FixedRate_d = .08;
FixedRate_f = .05;

Principal_d = 10000000;
Principal_f = 1200000000;

S0 = 1/110;

Construct term structures.

RateSpec_d = intenvset('StartDate',Settle,'EndDate',Maturity,'Rates',r_d,'Compounding',-1);
RateSpec_f = intenvset('StartDate',Settle,'EndDate',Maturity,'Rates',r_f,'Compounding',-1);

Use fixedbyzero:

B_d = fixedbyzero(RateSpec_d,FixedRate_d,Settle,Maturity,'Principal',Principal_d,'Reset',Reset);
B_f = fixedbyzero(RateSpec_f,FixedRate_f,Settle,Maturity,'Principal',Principal_f,'Reset',Reset);

Compute swap price. Based on Hull (see References), a cross currency swap can be valued with the following formula V_swap = S0*B_fB_d.

V_swap = S0*B_f - B_d
V_swap = 1.5430e+06

Input Arguments

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Annualized zero rate term structure, specified using intenvset to create a RateSpec.

Data Types: struct

Annual rate, specified as NINST-by-1 decimal annual rate or a NINST-by-1 cell array where each element is a NumDates-by-2 cell array and the first column is dates and the second column is associated rates. The date indicates the last day that the coupon rate is valid.

Data Types: double | cell

Settlement date, specified either as a scalar or NINST-by-1 vector of serial date numbers or date character vectors.

Settle must be earlier than Maturity.

Data Types: char | double

Maturity date, specified as a NINST-by-1 vector of serial date numbers or date character vectors representing the maturity date for each fixed-rate note.

Data Types: char | double

Name-Value Pair Arguments

Specify optional comma-separated pairs of Name,Value arguments. Name is the argument name and Value is the corresponding value. Name must appear inside quotes. You can specify several name and value pair arguments in any order as Name1,Value1,...,NameN,ValueN.

Example: [Price,DirtyPrice,CFlowAmounts,CFlowDates] = fixedbyzero(RateSpec,CouponRate,Settle,Maturity,'Principal',Principal)

Frequency of payments per year, specified as the comma-separated pair consisting of 'FixedReset' and a NINST-by-1 vector.

Data Types: double

Day count basis, specified as the comma-separated pair consisting of 'Basis' and a NINST-by-1 vector.

• 0 = actual/actual

• 1 = 30/360 (SIA)

• 2 = actual/360

• 3 = actual/365

• 4 = 30/360 (PSA)

• 5 = 30/360 (ISDA)

• 6 = 30/360 (European)

• 7 = actual/365 (Japanese)

• 8 = actual/actual (ICMA)

• 9 = actual/360 (ICMA)

• 10 = actual/365 (ICMA)

• 11 = 30/360E (ICMA)

• 12 = actual/365 (ISDA)

• 13 = BUS/252

Data Types: double

Notional principal amounts, specified as the comma-separated pair consisting of 'Principal' and a vector or cell array.

Principal accepts a NINST-by-1 vector or NINST-by-1 cell array, where each element of the cell array is a NumDates-by-2 cell array and the first column is dates and the second column is its associated notional principal value. The date indicates the last day that the principal value is valid.

Data Types: cell | double

End-of-month rule flag for generating dates when Maturity is an end-of-month date for a month having 30 or fewer days, specified as the comma-separated pair consisting of 'EndMonthRule' and a nonnegative integer [0, 1] using a NINST-by-1 vector.

• 0 = Ignore rule, meaning that a payment date is always the same numerical day of the month.

• 1 = Set rule on, meaning that a payment date is always the last actual day of the month.

Data Types: logical

Flag to adjust cash flows based on actual period day count, specified as the comma-separated pair consisting of 'AdjustCashFlowsBasis' and a NINST-by-1 vector of logicals with values of 0 (false) or 1 (true).

Data Types: logical

Holidays used in computing business days, specified as the comma-separated pair consisting of 'Holidays' and MATLAB date numbers using a NHolidays-by-1 vector.

Data Types: double

Business day conventions, specified as the comma-separated pair consisting of 'BusinessDayConvention' and a character vector or a N-by-1 cell array of character vectors of business day conventions. The selection for business day convention determines how non-business days are treated. Non-business days are defined as weekends plus any other date that businesses are not open (e.g. statutory holidays). Values are:

• actual — Non-business days are effectively ignored. Cash flows that fall on non-business days are assumed to be distributed on the actual date.

• follow — Cash flows that fall on a non-business day are assumed to be distributed on the following business day.

• modifiedfollow — Cash flows that fall on a non-business day are assumed to be distributed on the following business day. However if the following business day is in a different month, the previous business day is adopted instead.

• previous — Cash flows that fall on a non-business day are assumed to be distributed on the previous business day.

• modifiedprevious — Cash flows that fall on a non-business day are assumed to be distributed on the previous business day. However if the previous business day is in a different month, the following business day is adopted instead.

Data Types: char | cell

Output Arguments

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Floating-rate note prices, returned as a (NINST) by number of curves (NUMCURVES) matrix. Each column arises from one of the zero curves.

Dirty bond price (clean + accrued interest), returned as a NINST- by-NUMCURVES matrix. Each column arises from one of the zero curves.

Cash flow amounts, returned as a NINST- by-NUMCFS matrix of cash flows for each bond.

Cash flow dates, returned as a NINST- by-NUMCFS matrix of payment dates for each bond.

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Fixed-Rate Note

A fixed-rate note is a long-term debt security with a preset interest rate and maturity, by which the interest must be paid.

The principal may or may not be paid at maturity. In Financial Instruments Toolbox™, the principal is always paid at maturity. For more information, see Fixed-Rate Note.

 Hull, J. Options, Futures, and Other Derivatives. Prentice-Hall, 2011.