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Overview
This processing document will explain the computation of accrued income for bonds at the position level. It will show information on position accruals for bonds that have been purchased, bonds that are currently held, and bonds that are being sold.
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Purchase of a Bond
When purchasing a bond, the buyer must buy the accrued income through the day before settlement date. The bond will then start accruing on settlement date of the trade.
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The 0% returns for the bond and total fund until 2/19/2009 are indicative of the fact that the portfolio has pre-paid for interest through 2/19/2009 and does not begin accruing interest until 2/20/2009. On 2/20/2009, the returns reflect the earning of the daily interest accrual of 1,000.
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Valuation
Date | Component | Beginning Market Value Income | Negative Cash Flows | Positive Cash Flows | Ending Market Value Income | Rate of Return |
2/20/2009 | Total Fund | 6,000,000 | 6,001,000 | 0.0167% | ||
2/20/2009 | Bond A | 4,035,000 | 4,036,000 | 0.0248% | ||
2/20/2009 | Cash | 1,965,000 | 1,965,000 | 0% | ||
2/21/2009 | Total Fund | 6,001,000 | 6,002,000 | 0.0167% | ||
2/21/2009 | Bond A | 4,036,000 | 4,037,000 | 0.0248% | ||
2/21/2009 | Cash | 1,965,000 | 1,965,000 | 0% | ||
2/22/2009 | Total Fund | 6,002,000 | 6,003,000 | 0.0167% | ||
2/22/2009 | Bond A | 4,037,000 | 4,038,000 | 0.0248% | ||
2/22/2009 | Cash | 1,965,000 | 1,965,000 | 0% | ||
2/23/2009 | Total Fund | 6,003,000 | 6,004,000 | 0.0167% | ||
2/23/2009 | Bond A | 4,038,000 | 4,039,000 | 0.0248% | ||
2/23/2009 | Cash | 1,965,000 | 1,965,000 | 0% |
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Sale of a Bond
When a bond holding is sold, the accrued interest on the sale transaction is also computed through day before settlement date.
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For the above example, performance calculations for the cash balance remain straight forward and returns can be computed for the cash balance and the total portfolio. However, the returns for the bond position need special logic to compute daily returns at the individual bond level. (Note: for simplicity the price of the bond is held constant at 100, but price fluctuations would be incorporated into any return calculation).
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Valuation
Date | Component | Beginning Market Value Income | Negative Cash Flows | Positive Cash Flows | Ending Market Value Income | Rate of Return |
5/10/2009 | Total Fund | 6,080,000 | 6,081,000 | 0.0164% | ||
5/10/2009 | Bond A | 4,115,000 | 4,116,000 | 0.0243% | ||
5/10/2009 | Cash | 1,965,000 | 1,965,000 | 0% | ||
5/11/2009 | Total Fund | 6,081,000 | 6,082,000 | 0.0164% | ||
5/11/2009 | Bond A | 4,116,000 | -4,119,000 | -2,000 | N/A | |
5/11/2009 | Cash | 1,965,000 | 4,119,000 | 6,084,000 | 0% | |
5/12/2009 | Total Fund | 6,082,000 | 6,083,000 | 0.0164% | ||
5/12/2009 | Bond A | -2,000 | -1,000 | N/A | ||
5/12/2009 | Cash | 6,084,000 | 6,084,000 | 0% | ||
5/13/2009 | Total Fund | 6,083,000 | 6,084,000 | 0.0164% | ||
5/13/2009 | Bond A | -1,000 | 0 | N/A | ||
5/13/2009 | Cash | 6,084,000 | 6,084,000 | 0% | ||
5/14/2009 | Total Fund | 6,084,000 | 6,084,000 | 0% | ||
5/14/2009 | Bond A | 0 | 0 | 0% | ||
5/14/2009 | Cash | 6,084,000 | 6,084,000 | 0% | ||
5/15/2009 | Total Fund | 6,000,000 | 6,084,000 | 0% | ||
5/15/2009 | Bond A | 0 | 0 | 0% | ||
5/15/2009 | Cash | 6,084,000 | 6,084,000 | 0% |
The positive returns for the total fund from 5/11/2009 through 5/14/2009 are indicative of the fact that the portfolio is still earning interest through 5/13/2009. The negative accrued income at the bond position level reflects the fact that the interest sold is larger than the actual income earned from the period of trade date through settlement date - 1. The movement of this value to 0 shows the daily accrued income earned for each day leading up to the settlement of the sale. While the negative accrued income balance may some intuitively obvious at first glance, the above example shows that the negative balance offsets the income portion of the receivable from the sale. This receivable is already incorporated into the traded cash balance and needs to be offset at the security level until the income is actually earned. This allows for an accurate daily return at the total fund level instead of crediting multiple days' worth of income into one day and overstating that day’s return.
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Custom Return Calc
Custom return logic is required to accurately compute the individual bond return during the settlement period of the sale, and will be defined in a future version of this document.