BONDS XL adheres to the industry conventions for its calculations. The
Security Industry Association publishes a book titled "Standard Securities Calculation
Methods" which describes many of the standard formulas and conventions used in
the fixed income markets.
The National Association of Securities Dealers (NASD) and the Municipal
Securities Rule-Making Board (MSRB) requires specific approaches for fixed income
calculations. The "standards" are not static, however; Montgomery Investment
Technology is continually monitoring the regulations and will incorporate any
changes in future releases of BONDS XL. The following examples provide the output
based on the known standards as of the publication date of this User's Guide.
Industry conventions are often confusing but must be understood. When pricing
a Corporate bond, if the yield is the same as the coupon, the price is forced
to 100.
Prices for U.S. Treasury and Agency securities with odd-first coupons must
take into consideration the odd coupon. When pricing Corporate and Municipal
bonds, the odd coupon is ignored. BONDS XL also follows this convention when
calculating the sensitivities (i.e. duration).
However, the Corporate bond market is beginning to recognize the odd coupon
calculations.
If a bond is sold with a concession, the amount of the concession must be
computed and applied to the price or yield in order to calculate the actual cost of
the security.
Callable bond calculations should take into consideration all call dates and
call prices. The principal of a minimum assured yield should be adhered to.
The calendar convention used for pricing U.S. Treasury securities is
Actual/Actual. The convention for U.S. Agency securities is 30/360.
The calendar convention adopted by the National Association of Security
Dealers and the Municipal Securities Rule-Making Board is the 30/360 calendar.
The rounding convention varies depending on the type of security. The price
of U.S. Treasury and Agency bonds is calculated to seven significant decimals
and rounded to 6 decimals. The rounding is to take place just prior to the
display of price and calculation of principal.
The price of Municipal and Corporate bonds should be accurate to seven places
after the decimal, and then truncated to three decimals. The truncation should
take place just prior to the display of price and calculation of principal.
Yield calculations follow another set of conventions. The yield of U.S.
Treasury and Agency securities is rounded to eight decimal places. The yield of
Corporate and Municipal securities should be accurate to six decimal places and
rounded to five places.
Please keep in mind that the "industry conventions" are not static. We
recommend that you purchase a copy of "Standard Securities Calculation Methods" from
the Security Industry Association and keep abreast of any proposed or
implemented changes in the standards. Montgomery Investment Technology will upgrade and
revise BONDS XL when warranted.
Industry Conventions