Template:Business day conventions: Difference between revisions
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How one adjusts the [[calculation period]] for a given interest [[coupon]] to account for the fact that it ends on a non-working day, and that therefore the interest payment can’t be made on schedule. There are two implications here: one is ''the day on which the interest payment is actually made'', the other is ''the day on which the [[interest period]] in question is [[deemed]] to end. [[Fixed rate]] products are a lot less bother than [[floating rate]] products. | How one adjusts the [[calculation period]] for a given interest [[coupon]] to account for the fact that it ends on a non-working day, and that therefore the interest payment can’t be made on schedule. There are two implications here: one is ''the day on which the interest payment is actually made'', the other is ''the day on which the [[interest period]] in question is [[deemed]] to end''. [[Fixed rate]] products are a lot less bother than [[floating rate]] products. | ||
*'''[[Fixed rate]] products - yeah whatever''': Folks tend to be fairly sanguine about interest payments for [[fixed rate]] interest products, since nothing really hangs on when a period begins or ends (you make it up over the life of the product: if this period is thirty one days, the next one will be twenty nine, and the [[present value]] of the difference between getting a payment now for 31 days and a payment in a month for 29 days, and just getting two payments for 30 days each. You can't pay your interest payment on a non-work day, so just pay it on the next business day, but the calculation period runs to the originally scheduled day. You lose a day or two's interest on the interest, but you’ll make that up next time. | *'''[[Fixed rate]] products - yeah whatever''': Folks tend to be fairly sanguine about interest payments for [[fixed rate]] interest products, since nothing really hangs on when a period begins or ends (you make it up over the life of the product: if this period is thirty one days, the next one will be twenty nine, and the [[present value]] of the difference between getting a payment now for 31 days and a payment in a month for 29 days, and just getting two payments for 30 days each. You can't pay your interest payment on a non-work day, so just pay it on the next business day, but the calculation period runs to the originally scheduled day. You lose a day or two's interest on the interest, but you’ll make that up next time. | ||
*'''[[Floating rate]] products - hold on tiger''': [[Floating rate products are a bit more nuanced because there is some path dependency here. The end of an interest [[calculation period]] determines not just the point at which you pay interest (and perhaps the number of days for which you pay it), but also the time at which you set the interest rate for the following period. Since interest rates — at least in the good old days — are volatile, the product is [[path dependent]] and a matter of a couple of days can make a difference to the overall amount of interest paid for the life of the product. Butterfly wings flapping and all that. | *'''[[Floating rate]] products - hold on tiger''': [[Floating rate]] products are a bit more nuanced because there is some [[path dependent|path dependency]] here. The end of an interest [[calculation period]] determines not just the point at which you pay interest (and perhaps the number of days for which you pay it), but also the time at which you set the interest rate for the following period. Since interest rates — at least in the good old days — are volatile, the product is [[path dependent]] and a matter of a couple of days can make a difference to the overall amount of interest paid for the life of the product. Butterfly wings flapping and all that. | ||
===[[Business day convention]]s for your reading pleasure=== | ===[[Business day convention]]s for your reading pleasure=== | ||
Revision as of 08:21, 17 May 2019
How one adjusts the calculation period for a given interest coupon to account for the fact that it ends on a non-working day, and that therefore the interest payment can’t be made on schedule. There are two implications here: one is the day on which the interest payment is actually made, the other is the day on which the interest period in question is deemed to end. Fixed rate products are a lot less bother than floating rate products.
- Fixed rate products - yeah whatever: Folks tend to be fairly sanguine about interest payments for fixed rate interest products, since nothing really hangs on when a period begins or ends (you make it up over the life of the product: if this period is thirty one days, the next one will be twenty nine, and the present value of the difference between getting a payment now for 31 days and a payment in a month for 29 days, and just getting two payments for 30 days each. You can't pay your interest payment on a non-work day, so just pay it on the next business day, but the calculation period runs to the originally scheduled day. You lose a day or two's interest on the interest, but you’ll make that up next time.
- Floating rate products - hold on tiger: Floating rate products are a bit more nuanced because there is some path dependency here. The end of an interest calculation period determines not just the point at which you pay interest (and perhaps the number of days for which you pay it), but also the time at which you set the interest rate for the following period. Since interest rates — at least in the good old days — are volatile, the product is path dependent and a matter of a couple of days can make a difference to the overall amount of interest paid for the life of the product. Butterfly wings flapping and all that.
Business day conventions for your reading pleasure
- No adjustment business day convention: The keep calm and carry on option: non-workdays of any kind are effectively ignored. Cashflows falling on non-workdays are assumed to be distributed on the actual date.
- Previous business day convention: Back to the day before: Cashflows falling on non-workdays are assumed to be distributed on the previous business day.
- Following business day convention: Cashflows falling on a non-workday are assumed to be distributed on the next business day.
- Modified previous business day convention: Cashflows falling on a non-workday are assumed to be distributed on the previous business day unless it would fall in a different month, in which case it’s the next business day.
- Modified following business day convention: Cashflows falling on a non-workday are assumed to be distributed on the next business day unless it would fall in a different month, in which case it’s the previous business day.
- End of month - no adjustment business day convention: All cashflows are assumed to be distributed on the final day of the month (even if it is not a workday).
- End of month - previous business day convention: All cashflows are assumed to be distributed on the final day of the month unless it is not a workday, in which case it's the previous business day.
- End of month - following business day convention: All cashflows are assumed to be distributed on the final day of the month unless it is not a workday, in which case it's the next business day.