fixedbycir

Price fixed rate note from Cox-Ingersoll-Ross interest-rate tree

Syntax

[Price,PriceTree] = fixedbycir(CIRTree,CouponRate,Settle,Maturity)

[Price,PriceTree] = fixedbycir(___,Name,Value)

Description

[Price,PriceTree] = fixedbycir(CIRTree,CouponRate,Settle,Maturity) prices a fixed-rate note from a Cox-Ingersoll-Ross (CIR) interest-rate tree using a CIR++ model with the Nawalka-Beliaeva (NB) approach.

[Price,PriceTree] = fixedbycir(___,Name,Value) adds additional name-value pair arguments.

Examples

Price a Fixed-Rate Note Using a CIR Interest-Rate Tree

Define the CouponRate for a fixed-rate note.

CouponRate = 0.03;

Create a RateSpec using the intenvset function.

Rates = [0.035; 0.042147; 0.047345; 0.052707]; 
Dates = [datetime(2017,1,1) ; datetime(2018,1,1) ; datetime(2019,1,1) ; datetime(2020,1,1) ; datetime(2021,1,1)]; 
ValuationDate = datetime(2017,1,1); 
EndDates = Dates(2:end)'; 
Compounding = 1; 
RateSpec = intenvset('ValuationDate', ValuationDate, 'StartDates', ValuationDate, 'EndDates',EndDates,'Rates', Rates, 'Compounding', Compounding); 

Create a CIR tree.

NumPeriods = length(EndDates); 
Alpha = 0.03; 
Theta = 0.02;  
Sigma = 0.1;   
Settle = datetime(2017,1,1); 
Maturity = datetime(2021,1,1); 
CIRTimeSpec = cirtimespec(ValuationDate, Maturity, NumPeriods); 
CIRVolSpec = cirvolspec(Sigma, Alpha, Theta); 

CIRT = cirtree(CIRVolSpec, RateSpec, CIRTimeSpec)

CIRT = struct with fields:
      FinObj: 'CIRFwdTree'
     VolSpec: [1x1 struct]
    TimeSpec: [1x1 struct]
    RateSpec: [1x1 struct]
        tObs: [0 1 2 3]
        dObs: [736696 737061 737426 737791]
     FwdTree: {[1.0350]  [1.0790 1.0500 1.0298]  [1.1275 1.0887 1.0594 1.0390 1.0270]  [1.1905 1.1406 1.1014 1.0718 1.0512 1.0390 1.0350]}
     Connect: {[3x1 double]  [3x3 double]  [3x5 double]}
       Probs: {[3x1 double]  [3x3 double]  [3x5 double]}

Price the 3% fixed-rate note.

[Price,PriceTree] = fixedbycir(CIRT,CouponRate,Settle,Maturity) 

Price = 92.1422

PriceTree = struct with fields:
     FinObj: 'CIRPriceTree'
       tObs: [0 1 2 3 4]
       dObs: [736696 737061 737426 737791 738157]
      PTree: {[92.1422]  [85.3662 92.1281 97.2889]  [82.9758 88.7891 93.5930 97.1838 99.4045]  [86.5182 90.2995 93.5160 96.0967 97.9835 99.1333 99.5196]  [100 100 100 100 100 100 100]}
     AITree: {[0]  [0 0 0]  [0 0 0 0 0]  [0 0 0 0 0 0 0]  [0 0 0 0 0 0 0]}
    Connect: {[3x1 double]  [3x3 double]  [3x5 double]}

Input Arguments

CIRTree — Interest-rate structure

structure

Interest-rate tree structure, created by cirtree

Data Types: struct

CouponRate — Coupon annual rate

decimal

Coupon annual rate, specified as a NINST-by-1 vector.

Data Types: double

Settle — Settlement date

datetime array | string array | date character vector

Settlement date, specified either as a scalar or a NINST-by-1 vector using a datetime array, string array, or date character vectors.

To support existing code, fixedbycir also accepts serial date numbers as inputs, but they are not recommended.

The Settle date for every fixed-rate note is set to the ValuationDate of the CIR tree. The fixed-rate note argument Settle is ignored.

Maturity — Maturity date

datetime array | string array | date character vector

Maturity date, specified as a NINST-by-1 vector using a datetime array, string array, or date character vectors representing the maturity date for each fixed-rate note.

To support existing code, fixedbycir also accepts serial date numbers as inputs, but they are not recommended.

Name-Value Arguments

Specify optional pairs of arguments as Name1=Value1,...,NameN=ValueN, where Name is the argument name and Value is the corresponding value. Name-value arguments must appear after other arguments, but the order of the pairs does not matter.

Before R2021a, use commas to separate each name and value, and enclose Name in quotes.

Example: [Price,PriceTree] = fixedbycir(CIRTree,CouponRate,Settle,Maturity,'FixedReset',4)

FixedReset — Frequency of payments per year

1 (default) | vector

Frequency of payments per year, specified as the comma-separated pair consisting of 'FixedReset' and a NINST-by-1 vector.

Data Types: double

Basis — Day count basis

0 (actual/actual) (default) | integer from 0 to 13

Day count basis representing the basis used when annualizing the input forward rate tree, specified as the comma-separated pair consisting of 'Basis' and a NINST-by-1 vector.

• 0 = actual/actual

• 1 = 30/360 (SIA)

• 2 = actual/360

• 3 = actual/365

• 4 = 30/360 (PSA)

• 5 = 30/360 (ISDA)

• 6 = 30/360 (European)

• 7 = actual/365 (Japanese)

• 8 = actual/actual (ICMA)

• 9 = actual/360 (ICMA)

• 10 = actual/365 (ICMA)

• 11 = 30/360E (ICMA)

• 12 = actual/365 (ISDA)

• 13 = BUS/252

For more information, see Basis.

Data Types: double

Principal — Notional principal amounts or principal value schedules

100 (default) | vector or cell array

Notional principal amounts, specified as the comma-separated pair consisting of 'Principal' and a vector or cell array.

Principal accepts a NINST-by-1 vector or NINST-by-1 cell array, where each element of the cell array is a NumDates-by-2 cell array and the first column is dates and the second column is its associated notional principal value. The date indicates the last day that the principal value is valid.

Data Types: cell | double

EndMonthRule — End-of-month rule flag for generating dates when Maturity is end-of-month date for month having 30 or fewer days

1 (in effect) (default) | nonnegative integer [0,1]

End-of-month rule flag for generating dates when Maturity is an end-of-month date for a month having 30 or fewer days, specified as the comma-separated pair consisting of 'EndMonthRule' and a nonnegative integer [0, 1] using a NINST-by-1 vector.

• 0 = Ignore rule, meaning that a payment date is always the same numerical day of the month.

• 1 = Set rule on, meaning that a payment date is always the last actual day of the month.

Data Types: logical

AdjustCashFlowsBasis — Flag to adjust cash flows based on actual period day count

false (default) | value of 0 (false) or 1 (true)

Flag to adjust cash flows based on actual period day count, specified as the comma-separated pair consisting of 'AdjustCashFlowsBasis' and a NINST-by-1 vector of logicals with values of 0 (false) or 1 (true).

Data Types: logical

Holidays — Holidays used in computing business days

if not specified, the default is to use holidays.m (default) | MATLAB^® dates

Holidays used in computing business days, specified as the comma-separated pair consisting of 'Holidays' and MATLAB dates using a NHolidays-by-1 vector.

Data Types: datetime

BusinessDayConvention — Business day conventions

actual (default) | character vector | cell array of character vectors

Business day conventions, specified as the comma-separated pair consisting of 'BusinessDayConvention' and a character vector or a N-by-1 cell array of character vectors of business day conventions. The selection for business day convention determines how nonbusiness days are treated. Nonbusiness days are defined as weekends plus any other date that businesses are not open (e.g. statutory holidays). Values are:

• actual — Nonbusiness days are effectively ignored. Cash flows that fall on nonbusiness days are assumed to be distributed on the actual date.

• follow — Cash flows that fall on a non-business day are assumed to be distributed on the following business day.

• modifiedfollow — Cash flows that fall on a non-business day are assumed to be distributed on the following business day. However if the following business day is in a different month, the previous business day is adopted instead.

• previous — Cash flows that fall on a non-business day are assumed to be distributed on the previous business day.

• modifiedprevious — Cash flows that fall on a non-business day are assumed to be distributed on the previous business day. However if the previous business day is in a different month, the following business day is adopted instead.

Data Types: char | cell

Output Arguments

Price — Expected fixed-rate note prices at time 0

vector

Expected fixed-rate note prices at time 0, returned as a NINST-by-1 vector.

PriceTree — Tree structure of instrument prices

structure

Tree structure of instrument prices, returned as a MATLAB structure of trees containing vectors of instrument prices and accrued interest, and a vector of observation times for each node. Within PriceTree:

• PriceTree.tObs contains the observation times.

• PriceTree.dObs contains the observation dates.

• PriceTree.PTree contains the clean prices.

• PriceTree.AITree contains the accrued interest.

More About

Fixed-Rate Note

A fixed-rate note is a long-term debt security with a preset interest rate and maturity, by which the interest must be paid.

The principal may or may not be paid at maturity. In Financial Instruments Toolbox™, the principal is always paid at maturity. For more information, see Fixed-Rate Note.

References

[1] Cox, J., Ingersoll, J.,and S. Ross. "A Theory of the Term Structure of Interest Rates." Econometrica. Vol. 53, 1985.

[2] Brigo, D. and F. Mercurio. Interest Rate Models - Theory and Practice. Springer Finance, 2006.

[3] Hirsa, A. Computational Methods in Finance. CRC Press, 2012.

[4] Nawalka, S., Soto, G., and N. Beliaeva. Dynamic Term Structure Modeling. Wiley, 2007.

[5] Nelson, D. and K. Ramaswamy. "Simple Binomial Processes as Diffusion Approximations in Financial Models." The Review of Financial Studies. Vol 3. 1990, pp. 393–430.

Version History

Introduced in R2018a

R2022b: Serial date numbers not recommended

Although fixedbycir supports serial date numbers, datetime values are recommended instead. The datetime data type provides flexible date and time formats, storage out to nanosecond precision, and properties to account for time zones and daylight saving time.

To convert serial date numbers or text to datetime values, use the datetime function. For example:

t = datetime(738427.656845093,"ConvertFrom","datenum");
y = year(t)

y =

        2021

There are no plans to remove support for serial date number inputs.