Non perturbative key-rate contributions to bond returns

Abstract
We show a non-perturbative method to split the bond return into components coming from the different key-rates, the credit spread, the carry term, and another couple of minor components. We explicitly show the results for the case of a fixed-rate coupon bond with a price computed using cash-flow discounting with a yearly-compounded yield curve.
We also explain how to extend the method to a much wider-range of securities depending on an interest-rate curve, the credit spread, and possibly some other financial variables.
Among the minor return components we find a term coming from the compounding effect the of interest rates and the credit spread, as well as a contribution that summarises the effect of the other risk drivers.
Finally we show how the bond carry term, in the presence of an accruing coupon, can be split into a coupon part and a convergence contribution.

Keywords: performance contribution, fixed-income attribution, key rates, bond pricing, interest-rate derivatives, fixed-income securities, pricing functions, interest-rate contribution, credit contribution, cash-flow discounting, spread/rate contribution, carry contribution, convergence contribution, coupon contribution

Pdf file: key-rate-contributions.pdf

key-rate-contributions

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