Convert Interest Rate Examples

The following examples describe two securities that convert the fixed income security's reference interest rate from one rate quotation basis to another. The securities have the Convert Interest Rate (tag 9154) field set to Yes. They each use a different rate conversion rule. For more information about these security options, see Convert a Security's Interest Rate from One Rate Quotation Basis to Another.

Discount ACT/360 to Daily ACT/365 Example

In this example, the security has the Convert Interest Rate (tag 9154) field set to Yes and the Rate Conversion Rule (tag 12849) field set to Discount ACT/360 to Daily ACT/360. This rate conversion rule is for use with assets such as commodity total return swaps.

Convert a 0.04% discount rate using an ACT/360 day count to a daily compounded rate using an ACT/365 day count. The calculation period is 8/30/13 to 11/29/13.

Coupon Rate = ((1 / (1 – (R * (N1 / D1))) ^ (1 / N2)) - 1) * D2

= ((1 / (1 – (0.04 * (91 / 360))) ^ (1 / 91)) - 1) * 365

= 0.0405576285332776%

R = Interest Rate = 0.04

N1 = Numerator of Original Day Count = 91

N2 = Numerator of New Day Count = 91

D1 = Denominator of Original Day Count = 360

D2 = Denominator of New Day Count = 365

Semi-annual 30/360 to Monthly 30/360 Example

In this example, the security has the Convert Interest Rate (tag 9154) field set to Yes and the Rate Conversion Rule (tag 12849) field set to Semi-annual 30/360 to Monthly 30/360. This rate conversion rule is for use with assets such as Canadian MBS.

Convert a 5% semi-annually compounded rate using a 30/360 day count to a monthly compounded rate using a 30/360 day count basis.

Coupon Rate = (((1 + (R / F1)) ^ (F1 * (1 / F2))) - 1) * F2

= (((1 + (5 / 2)) ^ (2 * (1 / 12))) - 1) * 12

= 4.9486985581730800%

R = Interest Rate = 5

F1 = Frequency of Original Basis = 2 (semi-annual)

F2 = Frequency of New Basis = 12 (monthly)