Modelling fixed rate vanilla bonds in LUSID

To model a bond you must first choose the correct LUSID instrument type. See all instrument types.

The rest of this article explains the lifecycle of a vanilla government bond issue with a regular coupon schedule and fixed principal. There is also an accompanying Jupyter Notebook that further demonstrates many of the operations and concepts.

Mastering an instrument

Note: You should use the ComplexBond instrument type if your coupon schedule is irregular. The Bond instrument type can only accept an irregular first coupon period; all other coupons must be regular.

There are numerous methods you can use to master an instrument of type Bond in the LUSID Security Master.

Some fields are common to all types of instrument, such as an intuitive name, the requirement to specify a set of identifiers, and the facility to store extra information as properties.

Fields in the economic definition object are specific to Bond. For more information on these fields, select Bond from the definition dropdown in the API documentation:

For example, the following call to the UpsertInstruments API masters a UK gilt in a custom instrument scope using a FIGI unique identifier. Note the fields specified below are the minimum required to master an instrument of type Bond:

curl -X POST "https://<your-domain>.lusid.com/api/api/instruments?scope=mycustominstrscope"
   -H "Content-Type: application/json-patch+json"
   -H "Authorization: Bearer <your-API-access-token>"
   -d '{
  "upsert-request-1": {
    "name": "UKT 0 ⅜ 10/22/26",
    "identifiers": {"Figi": {"value": "BBG00ZF1T9P5"}},
    "definition": {
      "instrumentType": "Bond",
      "startDate": "2016-10-22T10:00:00.0000000+00:00",
      "maturityDate": "2026-10-22T10:00:00.0000000+00:00",
      "domCcy": "GBP",
      "couponRate": 0.00375,
      "principal": 1
      "flowConventions": {
        "currency": "GBP",
        "paymentFrequency": "6M",
        "dayCountConvention": "Actual365",
        "rollConvention": "22",
        "businessDayConvention": "Following"
      }
    }
  }
}'

Note the following:

• The instrumentType must be Bond.

• The startDate should be the accrual start date; that is, the date from which interest is calculated.

• The maximum maturityDate is 31 December 2140.

• The couponRate should be expressed as a decimal rather than a percentage, so a bond paying:

  • 10% should have a couponRate of 0.1

  • 2.5% should have a couponRate of 0.025

  • 0.375% should have a couponRate of 0.00375.

• The principal can be any number, but we advise setting it to 1 to unitise the security and specifying the face or purchase amount on the transaction.

• The flowConventions object stores all the information necessary to determine coupon periods, accrued interest amounts and payment dates:

  • The paymentFrequency field can be any tenor, in this case 6M to signify twice yearly. Supported day count conventions.

  • The rollConvention field should count back from the maturity date, so in this case 22 for a bond maturing on 22 October, which means the coupon dates are 22 October and 22 April each year. We also recommend setting a businessDayConvention to determine what should happen if this is not a good business day. More information on roll and business day conventions. Note business days in LUSID are determined by holiday calendars.

  • The accrualDateAdjustment field is optional and defaults to Adjusted. This is suitable for European treasury bonds but for US treasury bonds we recommend Unadjusted.

  • The settleDays field in a flow convention is deprecated, and resetDays is ignored for fixed-rate bonds. The scope and code fields can be ignored unless you are loading a flow convention from a library.

• If you do not specify an exDividendConfiguration object, a bond has no ex-dividend period.

• If the first coupon payment is irregular, specify the firstCouponPayDate field.

Providing the request is successful, the response:

• Confirms the globally-unique LUID for the instrument

• Generates extra fields that are stored as part of the instrument definition and can be filtered on

• Supplies default values for fields not explicitly specified in the request:

{
  "values": {
    "request_id_1": {
      "scope": "mycustominstrscope",
      "lusidInstrumentId": "LUID_00003DS1",
      "name": "UKT 0 ⅜ 10/22/26",
      "identifiers": {
        "LusidInstrumentId": "LUID_00003DS1",
        "Figi": "BBG00ZF1T9P5"
      },
      "properties": [],
      "instrumentDefinition": {
        "startDate": "2016-10-22T10:00:00.0000000+00:00",
        "maturityDate": "2026-10-22T10:00:00.0000000+00:00",
        "domCcy": "GBP",
        "flowConventions": {
          "currency": "GBP",
          "paymentFrequency": "6M",
          "dayCountConvention": "Actual365",
          "rollConvention": "22",
          "businessDayConvention": "Following",
          "paymentCalendars": [],
          "resetCalendars": [],
          "settleDays": 0,
          "resetDays": 0,
          "leapDaysIncluded": true,
          "accrualDateAdjustment": "Adjusted",
        },
        "principal": 1,
        "couponRate": 0.00375,
        "identifiers": {},
        "calculationType": "Standard",
        "roundingConventions": [],
        "instrumentType": "Bond"
      },
      "state": "Active",
      "assetClass": "Credit",
      "domCcy": "GBP",
      "relationships": []
    }
  },
  ...
}

Understanding how LUSID determines coupon periods

LUSID uses the information in the flow convention to build a payment schedule. It implicitly assumes the last coupon period is regular, and counts back from the maturity date according to the payment frequency.

Note: Any bond with an irregular last coupon period must be mastered using the ComplexBond instrument type. More information.

If the bond has an irregular first coupon period you can set the optional firstCouponPayDate field to create either a long or short first coupon period.

Booking a transaction to establish a position

Once an instrument is mastered, you can book a transaction to record the acquisition of a quantity in a particular transaction portfolio. As mentioned above, we recommend unitising bond instruments and specifying the face or purchase amount on transactions.

For example, the following call to the BatchUpsertTransactions API acquires 75,000,000 units of a UK gilt uniquely identified by its LUID:

curl -X POST 'https://<your-domain>.lusid.com/api/api/transactionportfolios/FixedIncome/UK/transactions/$batchUpsert?successMode=Partial&preserveProperties=true'
  -H 'Content-Type: application/json-patch+json'
  -H 'Authorization: Bearer <your-API-access-token>'
  -d '{
  "transactionRequest-1": {
    "transactionId": "uk_gilt_purchase_001",
    "type": "BuyBond",
    "instrumentIdentifiers": {"Instrument/default/LusidInstrumentId": "LUID_00003DS1"},
    "transactionDate": "2024-02-22T00:00:00.0000000+00:00",
    "settlementDate": "2024-02-25T00:00:00.0000000+00:00",
    "units": 75000000,
    "transactionPrice": {
      "price": 102,
      "type": "CleanPrice"
    },
    "totalConsideration": {
      "amount": 0,
      "currency": "GBP"
    },
    "properties": {
      "Transaction/MyProperties/TradeCommission": {
        "key": "Transaction/MyProperties/TradeCommission",
        "value": {
          "metricValue": {
            "value": 200.00,
            "unit": "GBP"
          }
        }
      }
    }
  },
}'

Note the following:

• The type field invokes a custom BuyBond transaction type to confer a particular economic impact (see below).

• The units field specifies the face or purchase amount.

• The transactionPrice object records the clean market price (not including bond interest). This is used by LUSID to automatically calculate the gross consideration (see below).

• The totalConsideration object:

  • Sets the settlement currency to GBP.

  • Specifies a cost of 0 to enable LUSID to automatically derive the total consideration (see below).

Note: This example assumes the transaction, settlement and portfolio currencies are the same. If not, you can specify exchange rates.

You might create a BuyBond transaction type as follows:

curl -X PUT 'https://<your-domain>.lusid.com/api/api/transactionconfiguration/types/default/BuyBond?scope=default'
  -H 'Content-Type: application/json-patch+json'
  -H 'Authorization: Bearer <your-API-access-token>'
  -d '{
  "aliases": [
    {
      "type": "BuyBond",
      "description": "Transaction type for bond purchases",
      "transactionClass": "Basic",
      "transactionRoles": "AllRoles",
      "isDefault": false
    }
  ],
  "movements": [
    {
      "name": "Increase units of security",
      "movementTypes": "StockMovement",
      "side": "Side1",
      "direction": 1
    },
    {
      "name": "Decrease cash balance",
      "movementTypes": "CashCommitment",
      "side": "Side2",
      "direction": -1
    },
    {
      "name": "Report bond interest bought as a flow of value out of the security",
      "movementTypes": "Carry",
      "side": "Side1",
      "direction": 1
    }
  ],
  "calculations": [
    {
      "type": "Txn:BondInterest"
    },
    {
      "type": "Txn:GrossConsideration"
    },
    {
      "type": "DeriveTotalConsideration",
      "formula": "Txn:GrossConsideration + Properties[Transaction/MyProperties/TradeCommission]"
    }
  ]
}'

Note the following:

• The Txn:BondInterest transaction type calculation automatically calculates the amount of bond interest bought or sold and stores the result in the Transaction/default/BondInterest system property, available for use in sides.

• The Txn:GrossConsideration calculation automatically calculates gross consideration according to the formula cleanPV + bondInterest, and stores the result in the Transaction/default/GrossConsideration system property. To enable LUSID to calculate PV, note the portfolio must have a recipe registered with the default pricing model set to BondLookupPricer, though no extra market data is required. See how to do this.

• The DeriveTotalConsideration calculation calculates total consideration according to the given, user-defined formula, which in this case sums the gross consideration and total fees; this is the total cost of the transaction.

Confirming positions

You can call the GetHoldings API to see the impact of the transaction on security and cash holdings. More coming soon.

Auditing LUSID’s calculations of transaction amounts

You can call the BuildTransactions API to audit LUSID’s bond interest, gross consideration and total consideration calculations. More coming soon.

Valuing your position

To value your position, work through our valuation checklist. For a demonstration, see sections 5 and 6 of the accompanying Jupyter Notebook.

The following pricing models are suitable for instruments of type Bond; note your choice impacts the market data required, the LUSID store in which to load it, and the composition of your recipe.

Note: The default model for bonds is currently ConstantTimeValueOfMoney. You should change this to one of the alternatives below. See how to do this.

Assessing risk

LUSID supports both analytic and bump and valuation mechanisms for assessing risk; contact us if you need more information.

Managing PV, accrual and P&L on a daily basis

LUSID can report many hundreds of metrics in a valuation report. For a demonstration, see section 6 of the accompanying Jupyter Notebook.

Note the following:

• Valuation/PV* metrics calculate PV according to a formula specific to the pricing model. For both BondLookupPricer and SimpleStatic this is price / scaling factor * principal * units + accrual.

• Valuation/CleanPV* metrics calculate PV minus accrual.

• Valuation/Accrued* metrics calculate accrual according to the flow convention defined in the underlying instrument. In most cases this increases in amount until the payment date, at which point it resets to zero and starts to accrue again the next day; there is no date on which the accrued appears as the full value of the coupon because it is assumed to be paid the day a period completes. You can use the Valuation/Diagnostics/Accrual/* metrics to diagnose accrual calculations.

• Valuation/PnL/* metrics calculate unrealised profit/loss as the difference between the PV at the start and end of the valuation period. Note these metrics are currently being replaced by dedicated ProfitAndLoss/* metrics with windowing capabilities.

• Analytic/* metrics calculate yield to maturity and duration.

Monitoring the lifecycle of the instrument

Bonds typically produce a regular stream of cashflows and, upon maturity, return the final coupon and principal.

Note: An instrument cannot ‘expire’ in LUSID; it is still available post-maturity, although the valuation is zero. If you set your holding to zero it no longer appears in reports unless you are deliberately backdating.

Handling automatic lifecycle events

LUSID is transitioning to a system where it automatically emits lifecycle events for bonds. We provide default transaction templates that you can use as-is to automatically generate transactions in impacted portfolios, and recommendations for transaction types that deliver appropriate economic impacts. More information.

Contact us to turn this feature on in your environment. The following events are available for instruments of type Bond:

In the LUSID web app you can use Dashboard > Transactions in Output mode with a suitable window to monitor historical and future transactions, or alternatively call the BuildTransactions API directly. For example, in the picture below:

• Transactions in red represent historical bond coupon payments for the UK gilt mastered in this article with respect to a date 'today' of 26 February 2024;

• Transactions in green represent future bond coupon payments, the return of principal, and close-out of the position upon maturity:

Manually loading settlement transactions

If you do not want to turn on automatic instrument lifecycle events you can continue to monitor upcoming cashflows using Dashboards > CashLadder in the LUSID web app, or by calling the GetPortfolioCashLadder API directly. Note the recipe you specify must currently be set to use the ConstantTimeValueOfMoney pricing model for bonds.

You can call the GetUpsertablePortfolioCashFlows API to  return imminent cashflows as upsertable DTOs ready to manually load into LUSID as input transactions.