bondbybdt

Price bond from Black-Derman-Toy interest-rate tree

Syntax

[Price,PriceTree] = bondbybdt(BDTTree,CouponRate,Settle,Maturity)

[Price,PriceTree] = bondbybdt(___,Name,Value)

Description

[Price,PriceTree] = bondbybdt(BDTTree,CouponRate,Settle,Maturity) prices bond from a Black-Derman-Toy interest-rate tree. bondbybdt computes prices of vanilla bonds, stepped coupon bonds and amortizing bonds.

[Price,PriceTree] = bondbybdt(___,Name,Value) adds additional name-value pair arguments.

Examples

Price a Bond Using a BDT Tree

Price a 10% bond using a BDT interest-rate tree.

Load deriv.mat, which provides BDTTree. The BDTTree structure contains the time and interest-rate information needed to price the bond.

load deriv.mat;

Define the bond using the required arguments. Other arguments use defaults.

CouponRate = 0.10;
Settle = '01-Jan-2000';
Maturity = '01-Jan-2003';
Period = 1;

Use bondbybdt to compute the price of the bond.

Price = bondbybdt(BDTTree, CouponRate, Settle, Maturity, Period)

Price = 95.5030

Price a Stepped Coupon Bond

Price single stepped coupon bonds using market data.

Define the interest-rate term structure.

Rates = [0.035; 0.042147; 0.047345; 0.052707];
ValuationDate = 'Jan-1-2010';
StartDates = ValuationDate;
EndDates = {'Jan-1-2011'; 'Jan-1-2012'; 'Jan-1-2013'; 'Jan-1-2014'};
Compounding = 1;

Create the RateSpec.

RS = intenvset('ValuationDate', ValuationDate, 'StartDates', StartDates, 'EndDates',...
EndDates, 'Rates', Rates, 'Compounding', Compounding)

RS = struct with fields:
           FinObj: 'RateSpec'
      Compounding: 1
             Disc: [4x1 double]
            Rates: [4x1 double]
         EndTimes: [4x1 double]
       StartTimes: [4x1 double]
         EndDates: [4x1 double]
       StartDates: 734139
    ValuationDate: 734139
            Basis: 0
     EndMonthRule: 1

Create the stepped bond instrument.

Settle = '01-Jan-2010';
Maturity = {'01-Jan-2011';'01-Jan-2012';'01-Jan-2013';'01-Jan-2014'};
CouponRate = {{'01-Jan-2012' .0425;'01-Jan-2014' .0750}};
Period = 1;

Build the BDT tree and assume the volatility to be 10% using the following market data:

Sigma = 0.1;  
BDTTimeSpec = bdttimespec(ValuationDate, EndDates);
BDTVolSpec = bdtvolspec(ValuationDate, EndDates, Sigma*ones(1, length(EndDates))');
BDTT = bdttree(BDTVolSpec, RS, BDTTimeSpec)

BDTT = struct with fields:
      FinObj: 'BDTFwdTree'
     VolSpec: [1x1 struct]
    TimeSpec: [1x1 struct]
    RateSpec: [1x1 struct]
        tObs: [0 1 2 3]
        dObs: [734139 734504 734869 735235]
        TFwd: {[4x1 double]  [3x1 double]  [2x1 double]  [3]}
      CFlowT: {[4x1 double]  [3x1 double]  [2x1 double]  [4]}
     FwdTree: {[1.0350]  [1.0444 1.0543]  [1.0469 1.0573 1.0700]  [1.0505 ... ]}

Compute the price of the stepped coupon bonds.

PBDT= bondbybdt(BDTT, CouponRate, Settle,Maturity , Period)

PBDT = 4×1

  100.7246
  100.0945
  101.5900
  102.0820

Price Two Bonds with Amortization Schedules

Price two bonds with amortization schedules using the Face input argument to define the schedule.

Define the interest-rate term structure.

Rates = 0.035;
ValuationDate = '1-Nov-2011';
StartDates = ValuationDate;
EndDates = '1-Nov-2017';
Compounding = 1;

Create the RateSpec.

RateSpec = intenvset('ValuationDate', ValuationDate,'StartDates', StartDates,...
'EndDates', EndDates,'Rates', Rates, 'Compounding', Compounding);

Create the bond instrument. The bonds have a coupon rate of 4% and 3.85%, a period of one year, and mature on 1-Nov-2017.

CouponRate = [0.04; 0.0385];
Settle ='1-Nov-2011';
Maturity = '1-Nov-2017';
Period = 1;

Define the amortizing schedule.

Face = {{'1-Nov-2015' 100;'1-Nov-2016' 85;'1-Nov-2017' 70};
{'1-Nov-2015' 100;'1-Nov-2016' 90;'1-Nov-2017' 80}};

Build the BDT tree and assume the volatility to be 10%.

MatDates = {'1-Nov-2012'; '1-Nov-2013';'1-Nov-2014';'1-Nov-2015';'1-Nov-2016';'1-Nov-2017'};
BDTTimeSpec = bdttimespec(ValuationDate, MatDates);
Volatility = 0.1;  
BDTVolSpec = bdtvolspec(ValuationDate, MatDates, Volatility*ones(1,length(MatDates))');
BDTT = bdttree(BDTVolSpec, RateSpec, BDTTimeSpec);

Compute the price of the amortizing bonds.

Price = bondbybdt(BDTT, CouponRate, Settle, Maturity, 'Period',Period,...
'Face', Face)

Price = 2×1

  102.4791
  101.7786

Input Arguments

BDTTree — Interest-rate structure

structure

Interest-rate tree structure, created by bdttree

Data Types: struct

CouponRate — Bond coupon rate

positive decimal value

Bond coupon rate, specified as an NINST-by-1 decimal annual rate or NINST-by-1 cell array, where each element is a NumDates-by-2 cell array. The first column of the NumDates-by-2 cell array is dates and the second column is associated rates. The date indicates the last day that the coupon rate is valid.

Data Types: double | cell

Settle — Settlement date

serial date number | character vector

Settlement date, specified either as a scalar or NINST-by-1 vector of serial date numbers or date character vectors.

The Settle date for every bond is set to the ValuationDate of the BDT tree. The bond argument Settle is ignored.

Data Types: char | double

Maturity — Maturity date

serial date number | character vector

Maturity date, specified as a NINST-by-1 vector of serial date numbers or date character vectors representing the maturity date for each bond.

Data Types: char | double

Name-Value Arguments

Specify optional comma-separated pairs of Name,Value arguments. Name is the argument name and Value is the corresponding value. Name must appear inside quotes. You can specify several name and value pair arguments in any order as Name1,Value1,...,NameN,ValueN.

Example: [Price,PriceTree] = bondbybdt(BDTTree,CouponRate,Settle,Maturity,'Period',4,'Face',10000)

Period — Coupons per year

2 per year (default) | vector

Coupons per year, specified as the comma-separated pair consisting of 'Period' and an NINST-by-1 vector. Values for Period are 1, 2, 3, 4, 6, and 12.

Data Types: double

Basis — Day-count basis

0 (actual/actual) (default) | integer from 0 to 13

Day-count basis of the instrument, specified as the comma-separated pair consisting of 'Basis' and a NINST-by-1 vector.

• 0 = actual/actual

• 1 = 30/360 (SIA)

• 2 = actual/360

• 3 = actual/365

• 4 = 30/360 (PSA)

• 5 = 30/360 (ISDA)

• 6 = 30/360 (European)

• 7 = actual/365 (Japanese)

• 8 = actual/actual (ICMA)

• 9 = actual/360 (ICMA)

• 10 = actual/365 (ICMA)

• 11 = 30/360E (ICMA)

• 12 = actual/365 (ISDA)

• 13 = BUS/252

For more information, see Basis.

Data Types: double

EndMonthRule — End-of-month rule flag for generating dates when Maturity is end-of-month date for month having 30 or fewer days

1 (in effect) (default) | nonnegative integer [0,1]

End-of-month rule flag for generating dates when Maturity is an end-of-month date for a month having 30 or fewer days, specified as the comma-separated pair consisting of 'EndMonthRule' and a nonnegative integer [0, 1] using a NINST-by-1 vector.

• 0 = Ignore rule, meaning that a payment date is always the same numerical day of the month.

• 1 = Set rule on, meaning that a payment date is always the last actual day of the month.

Data Types: logical

IssueDate — Bond issue date

serial nonnegative date number | date character vector

Bond issue date, specified as the comma-separated pair consisting of 'IssueDate' and a NINST-by-1 vector using a serial nonnegative date number or date character vector.

Data Types: double | char

FirstCouponDate — Irregular first coupon date

serial nonnegative date number | date character vector

Irregular first coupon date, specified as the comma-separated pair consisting of 'FirstCouponDate' and a NINST-by-1 vector using a serial nonnegative date number or date character vector.

When FirstCouponDate and LastCouponDate are both specified, FirstCouponDate takes precedence in determining the coupon payment structure. If you do not specify a FirstCouponDate, the cash flow payment dates are determined from other inputs.

Data Types: double | char

LastCouponDate — Irregular last coupon date

serial nonnegative date number | date character vector

Irregular last coupon date, specified as the comma-separated pair consisting of 'LastCouponDate' and a NINST-by-1 vector using a serial nonnegative date number or date character vector.

In the absence of a specified FirstCouponDate, a specified LastCouponDate determines the coupon structure of the bond. The coupon structure of a bond is truncated at the LastCouponDate, regardless of where it falls, and is followed only by the bond's maturity cash flow date. If you do not specify a LastCouponDate, the cash flow payment dates are determined from other inputs.

Data Types: double | char

StartDate — Forward starting date of payments

Settle date (default) | serial date number | date character vector

Forward starting date of payments (the date from which a bond cash flow is considered), specified as the comma-separated pair consisting of 'StartDate' and a NINST-by-1 vector using serial date numbers or date character vectors.

If you do not specify StartDate, the effective start date is the Settle date.

Data Types: char | double

Face — Face value

100 (default) | nonnegative value | cell array of nonnegative values

Face or par value, specified as the comma-separated pair consisting of 'Face' and a NINST-by-1 vector of nonnegative face values or an NINST-by-1 cell array of face values or face value schedules. For the latter case, each element of the cell array is a NumDates-by-2 cell array, where the first column is dates and the second column is its associated face value. The date indicates the last day that the face value is valid.

Data Types: cell | double

Options — Derivatives pricing options

structure

Derivatives pricing options, specified as the comma-separated pair consisting of 'Options' and a structure that is created with derivset.

Data Types: struct

AdjustCashFlowsBasis — Flag to adjust cash flows based on actual period day count

false (default) | value of 0 (false) or 1 (true)

Flag to adjust cash flows based on actual period day count, specified as the comma-separated pair consisting of 'AdjustCashFlowsBasis' and a NINST-by-1 vector of logicals with values of 0 (false) or 1 (true).

Data Types: logical

BusinessDayConvention — Business day conventions

actual (default) | character vector | cell array of character vectors

Business day conventions, specified as the comma-separated pair consisting of 'BusinessDayConvention' and a character vector or a N-by-1 (or NINST-by-2 if BusinessDayConvention is different for each leg) cell array of character vectors of business day conventions. The selection for business day convention determines how non-business days are treated. Non-business days are defined as weekends plus any other date that businesses are not open (e.g. statutory holidays). Values are:

• actual — Non-business days are effectively ignored. Cash flows that fall on non-business days are assumed to be distributed on the actual date.

• follow — Cash flows that fall on a non-business day are assumed to be distributed on the following business day.

• modifiedfollow — Cash flows that fall on a non-business day are assumed to be distributed on the following business day. However if the following business day is in a different month, the previous business day is adopted instead.

• previous — Cash flows that fall on a non-business day are assumed to be distributed on the previous business day.

• modifiedprevious — Cash flows that fall on a non-business day are assumed to be distributed on the previous business day. However if the previous business day is in a different month, the following business day is adopted instead.

Data Types: char | cell

Holidays — Holidays used in computing business days

if not specified, the default is to use holidays.m (default) | MATLAB^® date numbers

Holidays used in computing business days, specified as the comma-separated pair consisting of 'Holidays' and MATLAB date numbers using a NHolidays-by-1 vector.

Data Types: double

Output Arguments

Price — Expected bond prices at time 0

vector

Expected bond prices at time 0, returned as a NINST-by-1 vector.

PriceTree — Tree structure of instrument prices

structure

Tree structure of instrument prices, returned as a MATLAB structure of trees containing vectors of instrument prices and accrued interest, and a vector of observation times for each node. Within PriceTree:

• PriceTree.PTree contains the clean prices.

• PriceTree.AITree contains the accrued interest.

• PriceTree.tObs contains the observation times.

More About

Vanilla Bond

A vanilla coupon bond is a security representing an obligation to repay a borrowed amount at a designated time and to make periodic interest payments until that time.

The issuer of a bond makes the periodic interest payments until the bond matures. At maturity, the issuer pays to the holder of the bond the principal amount owed (face value) and the last interest payment.

Stepped Coupon Bond

A step-up and step-down bond is a debt security with a predetermined coupon structure over time.

With these instruments, coupons increase (step up) or decrease (step down) at specific times during the life of the bond.

Bond with an Amortization Schedule

An amortized bond is treated as an asset, with the discount amount being amortized to interest expense over the life of the bond.