How to use the Bond Instrument packages¶
How to use a Bond Instrument in your application¶
As explained in the Getting Started section and on the Architecture page, your app should only depend on the interface layer of Daml Finance. For bonds this means that you should only include the bond interface package.
Your initialization scripts are an exception, since they are only run once when your app is initialized. These are used to create the necessary instrument factories. Your app can then create bond instruments through these factory contracts.
How to Create a Bond Instrument¶
There are different types of bonds, which mainly differ in the way the coupon is defined. In order to create a bond instrument you first have to decide what type of bond you need. The bond instrument package currently supports the following bond types:
Fixed rate bonds pay a constant coupon rate at the end of each coupon period. The coupon is quoted on a yearly basis (per annum, p.a.), but it could be paid more frequently (e.g. quarterly). For example, a bond could have a 2% p.a. coupon and a 6M coupon period. That would mean a 1% coupon is paid twice a year.
As an example we will create a bond instrument paying a 1.1% p.a. coupon with a 12M coupon period. This example is taken from Instrument/Bond/Test/FixedRate.daml , where all the details are available.
We start by defining the terms:
let issueDate = date 2019 Jan 16 firstCouponDate = date 2019 May 15 maturityDate = date 2020 May 15 notional = 1.0 couponRate = 0.011 couponPeriod = M couponPeriodMultiplier = 12 dayCountConvention = Act365Fixed businessDayConvention = Following
The day count convention is used to determine how many days, i.e., what fraction of a full year, each coupon period has. This will determine the exact coupon amount that will be paid each period.
The business day convention determines how a coupon date is adjusted if it falls on a non-business day.
We also need holiday calendars, which determine when to adjust dates.
We can use these variables to create a PeriodicSchedule:
let (y, m, d) = toGregorian firstCouponDate periodicSchedule = PeriodicSchedule with businessDayAdjustment = BusinessDayAdjustment with calendarIds = holidayCalendarIds convention = businessDayConvention effectiveDateBusinessDayAdjustment = None terminationDateBusinessDayAdjustment = None frequency = Periodic Frequency with rollConvention = DOM d period = Period with period = couponPeriod periodMultiplier = couponPeriodMultiplier effectiveDate = issueDate firstRegularPeriodStartDate = Some firstCouponDate lastRegularPeriodEndDate = Some maturityDate stubPeriodType = None terminationDate = maturityDate
This is used to determine the periods that are used to calculate the coupon. There are a few things to note here:
- The RollConventionEnum defines whether dates are rolled at the end of the month or on a given date of the month. In our example above, we went for the latter option.
- The StubPeriodTypeEnum
allows you to explicitly specify what kind of stub period the bond should have. This is optional
and not used in the example above. Instead, we defined the stub implicitly by specifying a
firstRegularPeriodStartDate: since the time between the issue date and the first regular period start date is less than 12M (our regular coupon period), this implies a short initial stub period.
Now that we have defined the terms we can create the bond instrument:
let instrument = InstrumentKey with issuer depository id = Id label version = "0" cid <- submitMulti [issuer] [publicParty] do exerciseCmd fixedRateBondFactoryCid FixedRate.Create with fixedRate = FixedRate with instrument description couponRate periodicSchedule holidayCalendarIds calendarDataProvider dayCountConvention currency notional lastEventTimestamp observers = M.fromList observers
Once this is done, you can create a holding on it using Account.Credit.
Floating rate bonds pay a coupon which is determined by a reference rate. There is also a rate spread, which is paid in addition to the reference rate.
Here is an example of a bond paying Euribor 3M + 1.1% p.a. with a 3M coupon period:
let issueDate = date 2019 Jan 16 firstCouponDate = date 2019 Feb 15 maturityDate = date 2019 May 15 referenceRateId = "EUR/EURIBOR/3M" notional = 1.0 couponSpread = 0.011 couponPeriod = M couponPeriodMultiplier = 3 dayCountConvention = Act365Fixed businessDayConvention = Following
Using these terms we can create the floating rate bond instrument:
let instrument = InstrumentKey with issuer depository id = Id label version = "0" cid <- submitMulti [issuer] [publicParty] do exerciseCmd floatingRateBondFactoryCid FloatingRate.Create with floatingRate = FloatingRate.FloatingRate with instrument description referenceRateId couponSpread periodicSchedule holidayCalendarIds calendarDataProvider dayCountConvention currency notional lastEventTimestamp observers = M.fromList observers
The reference rate (Euribor 3M) is observed once at the beginning of each coupon period and used for the coupon payment at the end of that period.
Callable bonds are similar to the bonds above, but in addition they can be redeemed by the issuer before maturity. The callability is restricted to some (or all) of the coupon dates. In other words, these bonds have a Bermudan style embedded call option.
Both fixed and floating rate coupons are supported by this instrument. In case of a floating rate, there is often a fixed spread as well. This can be represented by a fixed rate coupon, which is shown in the following example. Here is a bond paying Libor 3M + 0.1% p.a. with a 3M coupon period:
-- Libor + 0.1% coupon every 3M (with a 0% floor and a 1.5% cap) let rollDay = 15 issueDate = date 2022 Jan rollDay firstCouponDate = date 2022 Apr rollDay maturityDate = date 2024 Jan rollDay notional = 1.0 couponRate = 0.001 capRate = Some 0.015 floorRate = Some $ 0.0 couponPeriod = M couponPeriodMultiplier = 3 dayCountConvention = Act360 useAdjustedDatesForDcf = True businessDayConvention = Following referenceRateId = "USD/LIBOR/3M" floatingRate = Some FloatingRate with referenceRateId referenceRateType = SingleFixing CalculationPeriodStartDate fixingDates = FixingDates with periodMultiplier = -2 period = D dayType = Some Business businessDayConvention = NoAdjustment businessCenters = ["USD"]
The coupon rate in this example also has a 0% floor and a 1.5% cap. This is configurable, just set the cap or floor to None if it does not apply.
The fixed rate is fairly simple to define, but the floating rate requires more inputs. A FloatingRate data type is used to specify which reference rate should be used and on which date the reference rate is fixed for each coupon period.
The above variables can be used to create a couponSchedule:
couponSchedule = createPaymentPeriodicSchedule firstCouponDate holidayCalendarIds businessDayConvention couponPeriod couponPeriodMultiplier issueDate maturityDate
This couponSchedule is used to determine the coupon payment dates, where the businessDayConvention specifies how dates are adjusted. Also, useAdjustedDatesForDcf determines whether adjusted or unadjusted dates should be used for day count fractions (to determine the coupon amount).
In addition to the Libor/Euribor style reference rates, compounded SOFR and similar reference rates are also supported. In order to optimize performance, these compounded rates are calculated via a (pre-computed) continuously compounded index, as described in the ReferenceRateTypeEnum. For example, here is how daily compounded SOFR can be specified using the SOFR Index:
referenceRateId = "SOFR/INDEX" floatingRate = Some FloatingRate with referenceRateId referenceRateType = CompoundedIndex Act360
This instrument also allows you to configure on which coupon dates the bond is callable. This is done by specifying a separate callSchedule. The bond is callable on the last date of each schedule period. For example, if the bond is callable on every coupon date, simply set callSchedule = couponSchedule. Alternatively, if the bond is only callable every six months, this can be configured by specifying a different schedule:
-- Define a schedule for callability. The bond is callable on the *last* date of each schedule -- period. -- In this example, it is possible to call the bond every 6M (every second coupon date). callScheduleStartDate = issueDate callScheduleEndDate = maturityDate callPeriod = couponPeriod callPeriodMultiplier = 6 callScheduleFirstRegular = None -- Only used in case of an irregular schedule callSchedule = createPeriodicSchedule callScheduleFirstRegular holidayCalendarIds businessDayConvention callPeriod callPeriodMultiplier callScheduleStartDate callScheduleEndDate rollDay noticeDays = 5
The noticeDays field defines how many business days notice is required to call the bond. The election whether or not to call the bond must be done on this date.
Using these terms we can create the callable bond instrument:
let instrument = InstrumentKey with issuer depository id = Id label version = "0" cid <- submitMulti [issuer] [publicParty] do exerciseCmd callableBondFactoryCid Callable.Create with callable = Callable with instrument description floatingRate couponRate capRate floorRate couponSchedule noticeDays callSchedule holidayCalendarIds calendarDataProvider dayCountConvention useAdjustedDatesForDcf currency notional lastEventTimestamp prevElections =  observers = M.fromList observers
Unlike regular fixed and floating bonds, which are lifecycled based on the passage of time, this callable bond instrument contains an embedded option that is not automatically exercised. Instead, the custodian of the bond holding must manually decide whether or not to call the bond. This is done by making an Election.
This callable bond example is taken from Instrument/Bond/Test/Callable.daml , where all the details are available. Also, check out the Election based lifecycling tutorial for more details on how to define and process an Election in practice. Note that the sample bond above, which is callable only on some of the coupon dates, will require two types of lifecycling:
A zero coupon bond does not pay any coupons at all. It only pays the redemption amount at maturity.
Here is an example of a zero coupon bond:
let issueDate = date 2019 Jan 16 maturityDate = date 2020 May 15 notional = 1000.0
Based on this we create the zero coupon bond instrument:
let instrument = InstrumentKey with issuer depository id = Id label version = "0" cid <- submitMulti [issuer] [publicParty] do exerciseCmd zeroCouponBondFactoryCid ZeroCoupon.Create with zeroCoupon = ZeroCoupon with instrument description currency issueDate maturityDate notional lastEventTimestamp observers = M.fromList observers
Frequently Asked Questions¶
How do I transfer or trade a bond?¶
When you have created a holding on a bond instrument this can be transferred to another party. This is described in the Getting Started: Transfer tutorial.
In order to trade a bond (transfer it in exchange for cash) you can also initiate a delivery versus payment with atomic settlement. This is described in the Getting Started: Settlement tutorial.
How do I process coupon payments for a bond?¶
On the coupon payment date, the issuer will need to lifecycle the bond. This will result in a lifecycle effect for the coupon, which can be cash settled. This is described in detail in the Lifecycling and the Intermediated Lifecycling tutorials.
How do I redeem a bond?¶
On the redemption date, both the last coupon and the redemption amount will be paid. This is processed in the same way as a single coupon payment described above.