Welcome to the Fall 2010 issue of the BondEdge Customer Newsletter (formerly On the Edge), our semi-annual client newsletter that is designed to provide you with insight to our products and services, as well as updates on what’s new at Interactive Data.
Over the past year, I have spent a great deal of time meeting with clients and listening to them describe the challenges faced by their organizations. Many of these challenges have been brought about by ongoing market uncertainty and an unstable business environment that has impacted budgets and resources, among many other areas. These clients are focused on answering the question “how can we do more with less?”
Interactive Data Fixed Income Analytics understands this challenge and has introduced BondEdge OnDemand, a new fully-hosted and automated offering that provides clients with an alternative to installing and managing BondEdge software within their organization. It is designed to provide clients with a number of benefits, including lower total cost of ownership, greater flexibility with resources, and even more seamless access to our BondEdge support team. I believe that BondEdge OnDemand can help us to work even closer together and deepen our valued relationships, and encourage you to reach out to me or a member of our team to discuss this in more detail.
In our last newsletter, I mentioned that Interactive Data had entered into a definitive agreement to be acquired by investment funds managed by Silver Lake and Warburg Pincus. I am pleased to inform you the acquisition closed in July 2010, and we are moving forward under our new ownership structure. Interactive Data Corporation also recently announced a change in our Company’s leadership, as Mason Slaine was named chairman, president and CEO. We look forward to working with our new CEO, Mason, and our new owners to continue to invest in our business and to deliver innovative solutions that can help you be more successful each day.
I thank you for your business in 2010 and look forward to doing more together in 2011, and encourage you to contact me if you have questions or if I can provide any additional support.
Best regards,
Keith Webster
Managing Director
Interactive Data Fixed Income Analytics
Interactive Data Corporation named Mason Slaine chairman, president and chief executive officer of the Company in September 2010. Mr. Slaine replaced Raymond D’Arcy, who now serves as vice chairman of Interactive Data.
Mr. Slaine has held a number of executive positions at leading financial information and software companies over the past three decades. These include serving as president and CEO of Thomson Financial from 1994 to 1996 and chairman and CEO of Information Holdings, an electronic publisher in the intellectual property, science and health care fields from 1996 to 2004. Mr. Slaine is currently chairman of MLM Information Services, a leading vendor of corporate tax compliance software and services, which he founded in 2005 with Warburg Pincus.
Additional information about this announcement is available here.
Early in 2011, Interactive Data is planning to release a new version of BondEdge® that includes enhancements related to performance attribution, portfolio imports, system navigation, report content and functionality, and simulation analysis.
Factor-Based Performance Attribution and Returns
Effective with this release, BondEdge Version 3.30, clients will be able to create a report within Factor-based Performance Attribution that includes multiple portfolios and benchmarks (sometimes referred to as a “policy” report). This new capability within Performance Attribution will use benchmarks that have been previously assigned to the selected portfolios and will provide a convenient and efficient way to include multiple portfolio and benchmark performance attribution analyses within a single report. Clients will also have the ability to drill down into single portfolios and benchmarks for further performance attribution detail.
BondEdge Version 3.30 will also enable clients to include total returns that have been computed within Performance Attribution in certain reports accessible in the BondEdge Report Manager. The report types which will access total return include Holdings, Summary, and Multiple Portfolio reports.
Portfolio Imports
The BondEdge Portfolio Import File Template will be expanded so that data sources for sector, credit rating, and ticker symbol can be specified individually. For example, for bonds that have been modeled locally a client will be able to specify that credit ratings be retrieved from an accounting file while all other reference data items are retrieved from the BondEdge Local Database.
System Navigation
We are adding a number of modifications to further enhance the system navigation in BondEdge Next Generation, such as the ability to assign portfolio to folders from within the Setup Mode. Clients will also be able to more easily generate additional portfolios and reports without losing the current set of reports.
Report Content and Functionality
Effective with this release, clients will be able to create Portfolio reports that include the enhanced RMBS collateral data that was introduced into BondEdge in Version 3.2. The additional RMBS content includes both tranche and collateral oriented data (e.g. current subordination, loan delinquencies of underlying collateral), as well as deal data (e.g. underwriter, trustee, servicer).
Our Compliance module reports will also be available in the BondEdge Report Books mode, allowing clients to automate the printing and exporting of portfolio, benchmark, and exception reports.
We will be releasing additional graph reporting capabilities with this version, including enhanced bar chart graphs for sector view analysis, increased user control over graphs customization, and additional “fit to page” printing and exporting logic.
Simulation Analysis
Ending market yield to worst will be available as a reporting field in both our parallel and specified scenario analysis in Version 3.30. This new field will also be available in the BondEdge API simulation capability.
Clients will also be able to create custom simulation reports in which projected returns are sub-totaled by categories such as sector and credit rating. Moreover, security level return graphs will be made available in this version.
In early October, Interactive Data announced BondEdge® OnDemand. This offering provides clients access to the power of BondEdge’s sophisticated portfolio analytics through a fully-hosted software solution, minimizing the resources associated with maintaining and supporting an on-site installation.
This cost-effective option can provide financial institutions with greater simplicity and flexibility relative to their technology, analytics and investment management workflow, enabling them to focus on their investment management processes.
BondEdge OnDemand offers clients two levels of service:
Server and BondEdge Software Application Hosting Only:
Server and BondEdge Software Application Hosting with Portfolio Processing and Data Management:
We are pleased to announce that the following data items are now available in BondEdge Feed.
Nominal Spread – The difference between a security's yield to worst and the yield to worst of the average life matched point of the government curve.
DV01 – The "dollar value of a 01" - i.e., the estimated change in the price of the instrument given a 1bp change in the yield to worst.
Yield Value of 32nd – The change in yield to worst given a 1/32 change in the input price, as specified by the client.
Yield to Put – The Internal Rate of Return of a putable bond, assuming that the bond is put on the specified put date at the specified put price.
ZVO – The constant spread over the Treasury spot curve which equates the discounted cash flows derived from today's implied forward curve to the input price, as specified by the client, of the security. May be interpreted as the spread an investor would expect to earn if there was no volatility of interest rates.
Price to Date – Displays the stated maturity date unless various features are applicable (e.g. announced calls, sinking funds, prerefunding date, etc.)
Maturity Years – Remaining years to maturity.
Stated Maturity Years – Remaining years to stated maturity. Ignores the trading to call/put status, sinking fund, prerefunding and mandatory tender dates.
If you are interested in expanding your existing data feed output to include the additional fields above, please contact us at fia.info@interactivedata.com.
Interactive Data has announced that it provides end-of-day index values as well as analytics capabilities for ten of Accretive Asset Management, LLC's BulletsharesTM USD Corporate Bond Indices. Claymore Advisors, LLC recently licensed these indices to serve as the basis for a series of exchange-traded funds (ETFs).
Additional information about this announcement is available here.
Interactive Data Fixed Income Analytics has continued to participate in a number of industry conferences and tradeshows. These events have been directed at varied fixed income market segments, including investment managers, insurance companies, and broker dealers.
Here is a summary of our recent activity:
Advent User Conference – Interactive Data exhibited BondEdge at this annual event in Las Vegas from September 20-22 with a focus on the integration that exists between BondEdge and Advent Moxy 7.0. Clients can export proposed trades from the BondEdge Single and Multiple Portfolio “What-If” analysis in a format that can be imported into Advent Moxy 7.0.
SOA Valuation Actuary Symposium – Bill Burns, Ph.D., Director of Quantitative Research, presented at the Society of Actuaries Valuation Actuary Symposium in Chicago on September 21st. Bill provided a discussion on term structure, prepayment and loss models, as well as on considerations when projecting asset cash flows under differing scenarios.
Bond Dealers Association of America – Interactive Data exhibited our BondEdge Fixed Income Strategist offering at the National Fixed Income Conference and Technology Summit, held in Dallas on September 23 and 24. This event was directed at securities dealers and banks that are active in fixed income capital markets.
CFA Fixed Income Management Conference – Interactive Data exhibited BondEdge at this annual gathering of fixed income professionals in Newport Beach, CA on October 4 and 5 and hosted a dinner event for clients in attendance. Leading fixed income portfolio managers and analysts provided their perspective on recent and potential upcoming market trends at the event.
SOA Annual Meeting and Exhibit – Interactive Data exhibited BondEdge at this annual event in New York from October 17-20, with over 1,500 actuaries and other market participants attending this conference. Our focus at this event was related to our BondEdge Cash Flow Analyst for Insurance offering, which provides the ability to generate asset cash flows under multiple scenarios and the ability to integrate with leading insurance asset liability systems.
Duration, Convexity & Other Risk Measures
The Duration, Convexity & Other Risk Measures Webcast was attended by representatives from more than 150 firms. During the webcast, William Burns, Ph.D., Director of Quantitative Research, Christina Oberlin, Ph.D., Senior Quantitative Analyst and Louis Gehring, Senior Vice President, BondEdge Product Manager discussed the various definitions of duration and convexity and explored the concepts from first principle. Applications for these risk measures were demonstrated using analysis on a variety of different security types, including bonds with embedded options and interest-sensitive prepayments. A review of the BondEdge Multi-Factor Term Structure Model and its effects on RMBS effective duration and convexity measures were also discussed.
If you were unable to attend the event and are interested in requesting online access, please click here. To request more information, please contact us at fia.info@interactivedata.com
Inside BondEdge Next Generation: System Overview
The Inside BondEdge Next Generation: System Overview Webcast provided a review of the navigation capabilities and reporting engine of BondEdge Next Generation and included content pertinent to all BondEdge clients, including asset managers, insurance companies, broker-dealers, banks and consultants. Over 100 fixed income professionals attended the presentation.
Topics covered during this session included:
If you were unable to attend the event and are interested in requesting online access, please click here. To request more information, please contact us at fia.info@interactivedata.com
Ezequias Simon, Ph.D.
Senior Quantitative Analyst
Duration measures the price sensitivity of a security to parallel shifts in the term structure of interest rates. If rates always were to move in parallel, it would be possible to hedge a 30-year bond with a 1-year bond. However, this is not the case since in general rates do not always move in parallel. In fact, it is often the case that short term rates move in the opposite direction as long term rates. Principal component analysis can reveal the magnitude of the non-parallel behavior1. For this reason, risk managers want to understand the price sensitivity associated with different points on the yield curve for their holdings. This is exactly what key rate durations (KRDs) provide.
Key Rate Shifts
Within the KRD approach, the term structure is divided into different segments. The end points of each segment define the key rate points. Interest rates are then shifted at the key rate points in order to analyze a bond’s price sensitivity. The shift to the yield curve at a key rate point can be applied to either the associated par curve rate, or the underlying spot rate (i.e. rate stripped from the par curve)2.
For illustration purposes assume there are four key rate points: 7-, 10-, 20-, and 30-year maturities. A 1.00% shift in each key rate has the shape depicted in Figure 1. Note that a key rate shift affects all rates from the previous key point to the next one. For example, the 10-year key rate shift affects all rates from the 7-year key rate (previous) to the 20-year key rate (next). However, the effect is heavily concentrated around the 10-year key rate point and decreases linearly to zero as it approaches the adjacent key rates.
As one can observe, the sum of all the shifts to the yield curve at any maturity adds up to 1.00%. Therefore, key rate shifts allow one to break up a parallel shift into several nonparallel components3.
Armed with these key rate shifts, we are able to compute the KRDs with respect to up and down key rate shifts. For example, to compute the 10-year key rate duration of a security with price P, one should compute the price P+ after a positive 10-year key rate shift, and the price P– after a negative 10-year key rate shift. The 10-year key rate duration is computed by the formula: KRD10Y = 50 × (P––P+)/P. Similarly one can compute the other key rate durations.
We are able to see how a security is affected by changes at different maturities in the term structure of interest rates. In particular, a bond maturing in one year will not be affected by a 30-year key rate shift but by the shifts affecting the term structure up to the 1-year maturity of the bond.
Key Rate Duration in BondEdge
BondEdge® offers 6-month, 1-, 2-, 3-, 5-, 7-, 10-, 20-, 30-year key rate durations by default using a 1.00% shift at the key rate points. The user has the option to select whether to apply the key rate shifts to the par yield curve or the spot curve stripped from the par yields. This choice has deep consequences on the behavior of the key rate durations. For illustration, we will consider the effect of this user option on the key rate durations for zero-coupon bonds.
Par Curve vs. Spot Curve Shifts
In order to illustrate the differences between shifting the spot curve versus the par curve, assume that the initial par curve is flat with all yields at 5.00%. Consequently, the spot curve will be flat at 5.00% as well. We will now examine the patterns in the spot curves at the 10-year key rate point under both approaches.
Shifting the 10-year key rate point by 100 basis points and interpolating to the adjacent key rate points at 7-year and 20-year maturities provides the familiar “tent shaped” pattern as seen in Figure 2. Note that the 10-year key rate shift does not affect the portion of the term structure with a maturity of twenty years or greater. Similar results hold when negative rate shocks are applied at the 10-year key rate point. This means that the 10-year KRD of a zero coupon bond maturing in 20-years is zero using spot curve analytics.
On the other hand, Figure 3 illustrates what happens if we instead shift the 10-year par yield directly by 100 basis points and observe the effect on the associated spot curve. The resulting stripped 20-year spot rate is 4.736%, which is less than the original 20-year spot rate. This rate implies a price for a 20-year zero coupon bond of $39.21. Similarly, applying a 10-year key rate negative shift to the par yield curve would result in a stripped spot curve with higher spot rates for maturities of twenty years or longer. In particular, the resulting stripped 20-year spot rate would be 5.295%, which leads to a price of $35.16 for a 20-year zero-coupon bond. Since the base price of a 20-year zero coupon bond is $37.24, the 10-year key rate duration is:
KRD10Y = 50 × (P– – P+) / P = 50 × (35.16 – 39.21) / 37.24 = –5.44
This means that the 10-year KRD of a zero coupon bond maturing in 20 years is negative using par curve analytics as opposed to zero which is obtained from the spot curve analytics. Consequently, KRDs based on shifts to the par curve can produce results that are not as intuitive as those based on shifts to the spot curve.
Conclusion
In summary, zero-coupon bonds can have negative key rate durations when the key rate shifts are applied to the par yield curve. This usually happens for key-rates with a term less than the zero-coupon maturity. One should be aware of this behavior when choosing an appropriate curve for one’s needs.
Key rate duration is a useful tool to understand how securities respond to non-parallel shifts in the term structure of interest rates. However, the choice between a par curve and spot curve approach can profoundly affect the resulting key rate analytics.
1 Rebonato, R (1997) Interest Rate Option Models. John Wiley & Sons.
2 Refer to On The Edge Treasury Curves in BondEdge® (July, 1996), and Effective Duration: Subtleties and Considerations (Quarter 3, 2004) for more on the par and spot curve definitions.
3 Tuckman, B. (2002) Fixed Income Securities: Tools for Today’s Markets. 2nd ed. John Wiley & Sons
Analyzing Yield Curve Risk for Path-Dependent Securities in a Multi-Factor Term Structure Framework
This paper introduces the G2++ multi-factor term structure model and its implementation within BondEdge for analyzing the yield curve risk associated with path dependent securities such as fixed-rate and adjustable-rate mortgages, floating rate notes, and prepayment sensitive structured securities. In addition, Quasi-Monte Carlo simulation techniques and model calibration to current market volatility are discussed. A comparison of calculated risk measures, such as option-adjusted spread and option adjusted duration, with a single-factor model are also provided.
Please click here to request a copy of the paper.
A Quick Guide to Security Models in BondEdge®
This guide provides a summary of the analytical models, key inputs and assumptions used in modeling and deriving analytical risk measures for the various security types in BondEdge®. References to more in-depth documentation are provided in each section.
Please click here to request a copy of the paper.
Prepayment Modeling Challenges in the Wake of the 2008 Credit and Mortgage Crisis
This paper discusses five key factors that are considered when refining and maintaining the BondEdge® prepayment model. First, we consider the historical performance of the model. Second, we examine whether the risk measures across a wide range of vintages and coupon ranges are reasonable and consistent. Third, we keep a close eye on macro-economic variables that may influence prepayment behavior. Fourth, we compare our fixed rate mortgage (FRM) index duration against the major index providers. Fifth, we compare our model against the SIFMA dealer median prepayment speeds.
Please click here to read more.
Q. I am importing interest rate swaps and getting an error “frn1”. What does this mean?
A. The currency provided in your import file does not correspond to the index choice listed below. (See BondEdge Help Screen for Floating Rate Indices)
Currency |
Index Code |
Index Full Name |
|---|---|---|
| USD | LIB1MO | 1 Month LIBOR |
| USD | LIB3MO | 3 Month LIBOR |
| USD | LIB6MO | 6 Month LIBOR |
| USD | LIB12M | 12 Month LIBOR |
Currency |
Index Code |
Index Full Name |
| AUD | BBSW1M | 1Mo AUD Bnk Bill Swp Rt |
| AUD | BBSW3M | 3Mo AUD Bnk Bill Swp Rt |
| AUD | BBSW6M | 6Mo AUD Bnk Bill Swp Rt |
| AUD | BBSW12 | 12Mo AUD Bnk Bill Swp Rt |
| AUD | L1MAUD | 1 Month AUD LIBOR |
| AUD | L3MAUD | 3 Month AUD LIBOR |
| AUD | L6MAUD | 6 Month AUD LIBOR |
Currency |
Index Code |
Index Full Name |
| CAD | L1MCAD | 1 Month CAD LIBOR |
| CAD | L3MCAD | 3 Month CAD LIBOR |
| CAD | L6MCAD | 6 Month CAD LIBOR |
| CAD | CDR1MO | 1Mo CAD Offered Rate |
| CAD | CDR3MO | 3Mo CAD Offered Rate |
| CAD | CDR6MO | 6Mo CAD Offered Rate |
| CAD | CDR12MO | 12Mo CAD Offered Rate |
Currency |
Index Code |
Index Full Name |
| CHF | L1MCHF | 1 Month CHF LIBOR |
| CHF | L3MCHF | 3 Month CHF LIBOR |
| CHF | L6MCHF | 6 Month CHF LIBOR |
Currency |
Index Code |
Index Full Name |
| EUR | EIB1MO | 1 Month EURIBOR |
| EUR | EIB3MO | 3 Month EURIBOR |
| EUR | EIB6MO | 6 Month EURIBOR |
| EUR | EIB12M | 12 Month EURIBOR |
| EUR | L1MEUR | 1 Month EUR LIBOR |
| EUR | L3MEUR | 3 Month EUR LIBOR |
| EUR | L6MEUR | 6 Month EUR LIBOR |
Currency |
Index Code |
Index Full Name |
| GBP | L1MGBP | 1 Month GBP LIBOR |
| GBP | L3MGBP | 3 Month GBP LIBOR |
| GBP | L6MGBP | 6 Month GBP LIBOR |
Currency |
Index Code |
Index Full Name |
| JPY | L1MJPY | 1 Month JPY LIBOR |
| JPY | L3MJPY | 3 Month JPY LIBOR |
| JPY | L6MJPY | 6 Month JPY LIBOR |
| JPY | TIB1MO | 1 Month TIBOR |
| JPY | TIB3MO | 3 Month TIBOR |
| JPY | TIB6MO | 6 Month TIBOR |
| JPY | TIB12M | 12 Month TIBOR |
A. In BondEdge Next Generation, the “BE Standard Distribution” and all other sector view reports has a default set to “Display Custom Sectors in the 'Other' Category”. To incorporate the user’s sectors the user can create her/his own Distribution report and uncheck this default setting. To do this the user should go to the “Other Settings” tab and uncheck this default selection in the “Sector View Group by Fields” section.
Q. Can I get effective durations on all my bonds when I use the search criteria in a PortScan report?
A. In BondEdge Next Generation, entering an “effective duration” criteria and using as an example, a condition of “is > or =” with a value of “0” to your search criteria, will cause this data item to be displayed in the Portfolio Scan Results.
Limitations
This document is provided for informational purposes only. The information contained in this document is subject to change without notice and does not constitute any form of warranty, representation, or undertaking. Nothing herein should in any way be deemed to alter the legal rights and obligations contained in agreements between Interactive Data Fixed Income Analytics and its clients relating to any products or services described herein. Nothing herein is intended to constitute legal, tax or other professional advice and is not an offer of advisory services or investment advice. Interactive Data makes no warranties whatsoever, either express or implied, as to merchantability, fitness for a particular purpose, or any other matter. Without limiting the foregoing, Interactive Data makes no representation or warranty that any data or information supplied to or by it are complete or free from errors, omissions, or defects.
Interactive DataSM and the Interactive Data logo are either registered service marks or service marks of Interactive Data Corporation in the United States or other countries. BondEdge® is either a registered trademark or a trademark of Interactive Data Corporation in the United States or other countries. Pricing, evaluations and reference data are provided in the U.S. through Interactive Data Pricing and Reference Data, Inc. and internationally through Interactive Data (Europe) Ltd. and Interactive Data (Australia) Pty Ltd. Other products, services, or company names mentioned herein are the property of, and may be the service mark or trademark of, their respective owners.
Interactive Data Fixed Income Analytics is a division of Interactive Data Corporation.
