Callable Fixed-to-Floating (Tier1-style) Bonds

[domokane]

[quantinsights]

Hi @domokane, do you mean bonds that pay a fixed coupon upto a certain date, and then switch to a floating payment referencing an index - with a call/put feature?

Also, I will have to read up on discount margin to better understand the BondFRN object. I thought that for any ref index e.g. USD-LIBOR-3M, EURIBOR-6M or USD-SOFR-1D, the BondFRN class would accept a vector of forwards(projections) for these rates and use them.

I can try to come up with a prototype for such a "CallableFixedToFloatingBond" class, before it is production ready.

[quantinsights]

Also, one question - do you think it would be a good idea to create a standalone DefaultCurve object under curves, that lives independently - and can then be used in the whole framework for risky pricing?

[domokane]

Hi - Thanks for your suggestion and willingness to participate.

You are right. A properly implemented FRN would take a vector of forward rates. Discount margin is a crude approximation of that - it assumes all future libors after the first are the same. It is equivalent to the flat yield to maturity assumption used for bonds. A standalone default curve may be of use. There is a survival curve object in the CDS class. It all depends on how you wish to calibrate the default risk curve. Also for many of these bonds the price of the bond after the call date is driven by the credit spread - this alone determines if the bond prices below or above par - so this can be priced using a single source of uncertainty. It might be worth digging out some examples before you begin.

Best D