Sample security definitions

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Security setup examples

The following list shows how to set up securities with the types named. Note that only compulsory information is shown. For instance, if no credit rating is shown, the default of 'AAA' will be assigned.

Zero interest cash

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_CASH AUD

Notes

Zero interest cash generates no interest return. It should therefore only be used to model futures offsets, outstanding settlements and other non-physical cash holdings.

Interest bearing cash

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_CASH Interest(CURVE[0]) AUD CURVE

Notes

Interest bearing cash generates income on each day it is held. The annual interest rate for each interval is calculated using the Interest risk function, and the interest rate used is the cash rate from curve CURVE. The cash rate is given by CURVE[0], which is the shortest point on the curve.

For all securities containing this asset type, an additional returns category called 'Interest' will be displayed on attribution reports.

Bank bill

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_BILL AUD CURVE 30-Jun-2017

Notes

Bank bill future

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_BILL 0 AUD CURVE 30-Jun-2017

Notes

Bond priced from a zero curve

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_BOND_ZERO_CURVE AUD CURVE 30-Jun-2017 0.05 2

Notes

This example is for a bond priced off a zero coupon curve, with a maturity date of 30th June 2017, a annual coupon of 5%, paying two coupons per year.

A fixed coupon bond is a security that pays regular, fixed coupons at predetermined intervals up to and including the bond’s maturity date, at which time it also repays its principal. Coupon payments are typically made annually or semi-annually, although other payment frequencies are occasionally used.

The return of a bond is driven by accrued interest and the passage of time, by changes in the level of the yield curve, by changes in credit spread, and by a number of other smaller effects such as convexity and pull to par.

Some bonds have a non-standard first or last coupon. For instance, the usual interval between coupons may be a year, but for issuance reasons the time between the bond’s issuance and the first coupon payment may be set up to be more or less than a year. Although this changes the pricing and accrued interest calculations during this period, the returns of the bond are largely unaffected by such features, so they are ignored for attribution purposes.

Many bonds also have embedded options, allowing the issuer to call the bond and repay the capital earlier than the scheduled maturity date.

Bonds are priced as the sum of the various discounted cash flows generated by the security. Because coupon-paying bonds are ubiquitous within the fixed income markets, FIA provides specialised internal routines to price these securities to a very high degree of accuracy, using the relevant yield curve.

Bond priced from a YTM

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_BOND_YTM(BOND_ID[YTM]) AUD CURVE 30-Jun-2017 0.05 2

Notes

This example is for a bond priced off a supplied yield to maturity. The YTM must be available in column YTM in the weights and returns file for security BOND_ID.

Perpetual bond

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_PERPETUAL AUD CURVE 0.05 2

Notes

A perpetual bond has a coupon but no maturity date.

Bond future

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_BOND_ZERO_CURVE 0 AUD CURVE 30-Jun-2017 0.05 2

Notes

A bond future is set up with maturity date, coupon and coupon frequency of the future's cheapest-to-deliver (CTD) bond.

Delayed start bond

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_BOND_ZERO_CURVE AUD CURVE 30-Jun-2013 30-Jun-2017 0.05 2

Notes

This example is for a bond priced off a zero coupon curve, with a maturity date of 30th June 2017, a annual coupon of 5%, paying two coupons per year. The bond started to pay coupons on 30th June 2013.

Inflation-linked bond

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_BOND_ZERO_CURVE Inflation(AUD_CPI) AUD REAL_CURVE 15-Jan-2030 0.04 2

Notes

This example is for an inflation-linked bond priced off a real coupon curve. The bond generates an additional inflation carry return, which is calculated from historical values of the AUD_CPI time series, recorded in the index file.

Floating rate note

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_FRN_ZERO_CURVE(LIBOR) AUD ZERO_CURVE 15-Jan-2030 0.00025 12

Notes

This example is for a generic floating rate note, paying 12 coupons per year. The coupon is the most recently supplied value of LIBOR in the index file, plus a margin of 0.25% (the margin is supplied in the Coupon field).

Amortizing bond

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_SINKER_ZERO_CURVE AUD ZERO_CURVE 15-Jan-2030 0.03 2 8.5

Notes

This example is for a generic sinking security, paying 2 coupons per year, with a term of 8.5 years.

Credit-default swap (CDS)

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_CDS AUD ZERO_CURVE 15-Jan-2030 0.03 2

Notes

Credit default swaps direct all their return to a special category called CDS.

Mortgage-backed security (MBS) using the PSA prepayment model

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_MBS_PSA Paydown AUD ZERO_CURVE 15-Jan-2030 0.03 2 1

Notes

This function models a mortgage-backed security where the prepayments are modelled using the PSA function. In this example, the PSA rate is set to 1 (100%).

Paydown return is modelled by the Paydown function.

Mortgage-backed security (MBS) using supplied sinking schedule

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_SINKER_SCHEDULE(MBS_SINKING_SCHEDULE) Paydown_s(MBS_SINKING_SCHEDULE) AUD ZERO_CURVE 15-Jan-2030 0.03 2 1

Notes

This function models a mortgage-backed security where the prepayments are modelled using a supplied sinking schedule, recorded as MBS_SINKING_SCHEDULE in the index file.

Paydown return is modelled by the Paydown_s function.

Equity

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_Equity AUD

Notes

This function models an equity that has no yield curve dependencies of any type. All of its return will be assigned to Residual.

Forward

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_CASH AUD Forward

Notes

FX forwards generate return due to interest rate differentials. The simplest way to model such securities is to assign them the type FT_CASH and to direct all their return to a custom residual category such as 'Forward'. If the forward has been used for FX hedging, its return can be compared to the return from the hedged currency.

Option

UNDER CONSTRUCTION
Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name FT_CASH AUD Option

Notes

Perturbational security

Security ID Name Sector Effective date Pricing function Risk function Credit rating Effective exposure Currency Residual bucket Yield curves Start date Maturity Coupon Coupon frequency Strike Term PSA Paydown
ID Name AUD AUD_CURVE

Notes

This function models a security that uses the perturbational model for attribution. For these securities, the value of field Pricing function is left blank. In addition, values of yield to maturity (column 7) and modified duration (column 8) must be supplied in the weights and returns file. Maturity, coupon and frequency are not used by the attribution calculation, but may be required for reporting.

The perturbational approach does not require any information about the cash-flow structure of the security. Instead, the user supplies a set of risk numbers (yield to maturity, modified duration, convexity) that describe how the security’s return is affected by the passage of time and by changes in the yield curve. In other words, risk numbers are used as a proxy for an explicit pricing model that represents the relationship between interest rate changes and return.

The return over a given interval is calculated using the following expression1:

where

is the return of the security over the interval;

is the elapsed time over the interval, expressed as a fraction of a year;

is the yield to maturity of the security;

is the modified duration of the security, expressed in years;

is the change in the security’s zero coupon yield at the maturity date.

The perturbational security type may be used to model any type of security whose price is driven by the underlying market’s term structure. In practice, this means virtually all fixed income securities, including money market instruments (bills, FRNs, forwards) and longer-dated securities (bonds, MBS, inflation-linked securities).

However, there are some tradeoffs required in using this security type for attribution. Although no pricing model need be specified, more data is needed to use the perturbational model, and the results may not be as accurate, particularly when cash flows are not concentrated in a single bullet payment but are instead spread out over the security’s lifetime. This is because the perturbational approach implicitly assumes that the security’s price is determined by a single cash flow at some point during its lifetime.

The perturbational approach gives the most accurate results for securities with a single large cashflow, although it typically works well for the majority of coupon-paying bonds. However, the user can also use it in other cases, such as for securities where the cash flows are unknown but we have a good estimate of its interest rate sensitivity, or for complex securitized bonds.

For mortgage-backed securities (MBS) and securitized pools of MBS, it may be preferable to used effective duration as a measure of interest-rate sensitivity than the modified duration, which includes the effects of optionality and other security-specific effects.

Perturbational attribution can even be used for entire portfolios or benchmarks, if aggregate risk data is available.

Effective dating

To change one or more of a security's defining parameters over time, use the Effective date field.

For example, a bond is issued in USD with a 9.75% coupon, maturity date 20th March 2015, two coupons per year, and is priced off the USD_CURVE yield curve. At issue, the bond was assigned a AA credit rating but was downgraded to AA- on 15th June 2006. This security is represented by two entries in the security definition file:

Security ID Name Sector Effective date Pricing function Risk function Credit rating [...]
US00000MEGA MEGACORP 9.75% 20-MAR-2015 FT_BOND_ZERO_CURVE AA [...]
US00000MEGA MEGACORP 9.75% 20-MAR-2015 15/06/2006 FT_BOND_ZERO_CURVE AA- [...]

Both rows are identical except for the entries in the Effective date and Credit rating columns.

Any of the entries apart from the security's ID code may be changed during any security's lifetime, including pricing function and currency. For instance, a convertible bond may be modelled by changing its pricing function from FT_BOND_ZERO_CURVE to FT_EQUITY on the conversion date.

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