| Financial Toolbox | |
Terminology
Since terminology varies among texts on this subject, here are some basic definitions that apply to these Financial Toolbox functions. The Glossary contains additional definitions.
The settlement date of a bond is the date when money first changes hands; i.e., when a buyer pays for a bond. It need not coincide with the issue date, which is the date a bond is first offered for sale.
The first coupon date and last coupon date are the dates when the first and last coupons are paid, respectively. Although bonds typically pay periodic annual or semi-annual coupons, the length of the first and last coupon periods may differ from the standard coupon period. The toolbox includes price and yield functions that handle these odd first and/or last periods.
Successive quasi-coupon dates determine the length of the standard coupon period for the fixed income security of interest, and do not necessarily coincide with actual coupon payment dates. The toolbox includes functions that calculate both actual and quasi-coupon dates for bonds with odd first and/or last periods.
Fixed-income securities can be purchased on dates that do not coincide with coupon payment dates. In this case, the bond owner is not entitled to the full value of the coupon for that period. When a bond is purchased between coupon dates, the buyer must compensate the seller for the pro-rata share of the coupon interest earned from the previous coupon payment date. This pro-rata share of the coupon payment is called accrued interest. The purchase price, the price actually paid for a bond, is the quoted market price plus accrued interest.
The maturity date of a bond is the date when the issuer returns the final face value, also known as the redemption value or par value, to the buyer. The yield-to-maturity of a bond is the nominal compound rate of return that equates the present value of all future cash flows (coupons and principal) to the current market price of the bond.
The period of a bond refers to the frequency with which the issuer of a bond makes coupon payments to the holder.
| Period Value |
Payment Schedule |
| 0 |
No coupons. (Zero coupon bond.) |
| 1 |
Annual |
| 2 |
Semi-annual |
| 3 |
Tri-annual |
| 4 |
Quarterly |
| 6 |
Bi-monthly |
| 12 |
Monthly |
The basis of a bond refers to the basis or day-count convention for a bond. Basis is normally expressed as a fraction in which the numerator determines the number of days between two dates, and the denominator determines the number of days in the year. For example, the numerator of actual/actual means that when determining the number of days between two dates, count the actual number of days; the denominator means that you use the actual number of days in the given year in any calculations (either 365 or 366 days depending on whether or not the given year is a leap year).
| Basis Value |
Meaning |
| 0 (default) |
actual/actual |
| 1 |
30/360 |
| 2 |
actual/360 |
| 3 |
actual/365 |
The end-of-month rule affects a bond's coupon payment structure. When the rule is in effect, a security that pays a coupon on the last actual day of a month will always pay coupons on the last day of the month. This means, for example, that a semi-annual bond that pays a coupon on February 28 in nonleap years will pay coupons on August 31 in all years and on February 29 in leap years.
| End of Month Rule Value |
Meaning |
| 1 (default) |
Rule in effect. |
| 0 |
Rule not in effect. |
| | Pricing and Computing Yields for Fixed-Income Securities | SIA Framework | |