BondValuation: An R Package for Fixed Coupon Bond Analysis

Wadim Djatschenko

doi:10.32614/rj-2019-055

Abstract

The purpose of this paper is to introduce the R package BondValuation for analysis of large datasets of fixed coupon bonds. The conceptual heterogeneity of fixed coupon bonds traded in the global markets imposes a high degree of complexity on their comparative analysis. Contrary to baseline fixed income theory, in practice, the majority of bonds feature coupon period irregularities. In addition, there is a multitude of day count methods, which determine the interest accrual, the cash flows and the discount factors used in bond valuation. Several R packages, e.g., fBonds, RQuantLib, and YieldCurve, provide tools for fixed income analysis. However, none of them is capable of evaluating bonds featuring irregular first and/or final coupon periods, and neither provides adequate coverage of day count conventions currently used in the global bond markets. The R package BondValuation closes this gap.

Highlights

Bond valuation using the traditional present value approach is fundamental in financial theory and practice, the R community lacks applications that comprehensively handle the peculiarities of real-world fixed coupon bonds
Its seamless implementation in BondValuation is framed by a set of routines that assist the user in data quality evaluation and automatically correct corrupted entries
The calculations are performed under the assumption that interest accrual and temporal structure follow the same day count conventions (DCC)

Summary

Introduction

Bond valuation using the traditional present value approach is fundamental in financial theory and practice, the R community lacks applications that comprehensively handle the peculiarities of real-world fixed coupon bonds. A possible reason for the slow development of adequate computation tools concerns the matter’s theoretical intricacy, characterized by a complex interaction of day count conventions (DCC) and irregularities in the temporal structure of the fixed income instruments. A day count convention is an instrument-specific set of rules that prescribes the way in which calendar dates are converted to numerical values. Given a schedule of a bond’s anniversary dates (i.e., issue date, coupon payment dates, maturity date), a day count convention is used, e.g., to determine the fraction of regular coupon periods between two calendar dates within the bond’s life. Irregular first and final coupon periods occur irrespective of the stipulated day count convention. The lengths of the first and final coupon periods are measured in fractions of regular coupon periods and calculated according to the rules of the specified day count convention. A fist or final coupon period is irregular, if its length differs from 1, which is the length of a regular coupon period.

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Conclusion