Trade date

The date used as the point for calculation is the settlement date for the bond, the date on which a bond will change hands after it is traded. For a new issue of bonds the settlement date is the day when the bond stock is delivered to investors and payment is received by the bond issuer. The settlement date for a bond traded in the secondary market is the day that the buyer transfers payment to the seller of the bond and when the seller transfers the bond to the buyer. Different markets will have different settlement conventions for example, UK gilts normally settle one business day after the trade date (the notation used in bond markets is T+ 1) whereas Eurobonds settle on T + 3. The term value date is sometimes used in place of settlement date, however the two terms are not strictly synonymous. A settlement date can only fall on a business date, so that a gilt traded on a Friday will settle on a Monday. However a value date can sometimes fall on a nonbusiness day. 

There will be two parties to a repo trade, let us say Bank A (the seller of securities) and Bank B (the buyer of securities). On the trade date the two banks enter into an agreement whereby on a set date, the value or settlement date Bank A will sell to Bank B a nominal amount of securities in exchange for cash. The price received for the securities is the market price of the stock on the value date. The agreement also demands that on the termination date Bank B will sell identical stock back to Bank A at the previously agreed price consequently. Bank B will have its cash returned with interest at the agreed repo rate. 

EXHIBIT 10.5 Bloomberg Screen RRRA for Classic Repo Transaction, Trade Date 5 July 2000... 

Trade date Settlement date Stock (collateral)... 

Here we review some of the terminology used in the swaps market and explain how swaps are quoted. The date that the counterparties commit to the swap is called the trade date. The date that the swap begins accruing interest is called the effective date, while the date that the swap stops accruing interest is called the maturity date. How often the floating rate is changed is called the reset frequency. 

The cover is effective from trade date plus one day (this is not confined to business days). This is referred to as T + 1. 

The buyer of protection pays to the seller a periodic premium, often quarterly, and expressed on a per annum basis. The actual cash amounts of all future premium payments are always known, since the terms of the default swap are set on the trade date. Therefore, we can think of these payments as a series of cash flows and value them according to the method above. We define d to be a function representing the number of calendar days since the inception of the default swap. We then define an integer variable / to represent each premium payment date, such that d is a function of /, d(j). Time is also a function of /, and that is simply the number of years from t = 0 until t = j For our sample 2-year credit default swap, the dates are shown in Exhibit 22.2. 

Si-t n.triit EUR paralle shift Trade date Tuesday 1 Octobfu 2007 ... 

A forward-start swap s effective date is a considerable period—say, six months—after the trade date, rather than the usual one or two days. A forward start is used when one counterparty, perhaps foreseeing a rise in interest rates, wants to fix the cost of a future hedge or a borrowing now. The swap rate is calculated in the same way as for a vanilla swap. 

FIGURE 16.9 on the following page shows the cash flows received by a holder of 1 million nominal of the Treasury, together with the corresponding spot rates. On the trade date—March 25, 2004, for settlement on March 26—the bond was priced at 99-19+, for a yield of 4.0479 percent, and its convexity was 0.770. 

The bank or corporation enters into cash-settled contract for difference (CFD), which pays out in the event of a rise in government IL bond yields. The CFD has a term to maturity that ties in with the issue date of the IL bond. The CFD market maker has effectively shorted the government bond, from the CFD trade date until maturity. On the issue date, the market maker will provide a cash settlement if yields have risen. If yields have fallen, the IL bond issuer will pay the difference. However, this cost is netted out by the expected profit from the cheaper funding when the bond is issued. Meanwhile, if yields have risen and the bank or corporate issuer does have to fund at a higher rate, it will be compensated by the funds received by the CFD market maker. 

As of the trade date, this bond has three more coupons to pay plus its final maturity payment. The time to payment of each cash flow is shown in column G of FIGURE 17.4, which is a spreadsheet calculation of its yield. At our trade date, from Bloomberg page YA we see that the bond has a clean price of par and a redemption yield of 7.738 percent. This is shown at FIGURE 17.5. Can we check this on Excel ... 

We perform a similar exercise for a U.S. Treasury security, the 214 percent February 2007 bond. This security settles on a T+1 basis, so on our trade date of January 3, 2006, its yield is as at January 4, 2006. Also, Treasury bonds accrue interest on an act/act basis. Its yield and price of4.4l 2 percent and 97.67 respectively are given at FIGURE 17.8, the Bloomberg YA page. The confirmation of these is shown at Figure 17.5 again. 

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