Business-Day Adjustments and Bond Coupon Accrual Rules
Summary
The document examines whether a bond’s coupon accrual period changes when a scheduled payment date falls on a non-business day and is moved by a forward business-day convention. Its central lesson is that there is no universal rule: the bond’s prospectus or governing terms must specify whether the coupon is adjusted and whether later accrual periods roll from the adjusted date.
The answer offers heuristics, not dependable rules. Numeric day-count fractions, fixed coupons, and bonds may be less likely to have day-counted coupon amounts, while floating coupons, swaps, and loans are more likely to do so. It gives counterexamples, including fixed-coupon government bonds with differing treatment, and describes “stacking,” where an adjusted date shifts subsequent coupon dates until another adjustment occurs. These examples show why product labels and convention names alone cannot settle the calculation. The document does not resolve the particular bond’s treatment; the prospectus is the controlling evidence.
Key ideas
- A business-day shift in a coupon payment date does not determine the accrual treatment by itself.
- Consult the bond prospectus to establish whether the coupon amount is day-counted after an adjustment.
- Fixed versus floating coupons and bond versus swap or loan labels offer only rough clues.
- Some instruments use stacking, rolling later coupon dates from an adjusted payment date.
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Full text
# Business day convention in fixed income
# Business day convention in fixed income
I have a question regarding the business day convention. Suppose I have a bond that matures on the 17th of September 2023 and pays an annual coupon of $1%$. It has a $30/360$ day-count convention and a forward business day adjustment.
Now the 17th of September 2021 is a Friday. The 17th of September 2022 is a Saturday and the 17th of September 2023 is a Sunday. In the $30/360$ day count convention I get
days from 17th of September 2021 to 17th of September 2022 (daycount conenvtion): $360$
days from 17th of September 2022 to 17th of September 2023 (daycount convention): $360$
But since 17th of September 2022 is a Saturday, the forward adjustment kicks in and coupon payment is exchanged on the 19th of September. Now my question:
Since payment date is adjusted, does the same apply to the accrual period? That means on the 19th of September the bond holder receives $N\cdot0.01\frac{362}{360}$ for notional $N$? Moreover, is the next accrual period then also adjusted, i.e. from the 19th of September 2022 to the 18th September 2023?
## Answer by Dimitri Vulis (score 4, accepted)
https://quant.stackexchange.com/a/72198
There is no universal answer. The coupon may or may not be daycounted. You should figure this out from the prospectus, rather than guess.
The coupon is less likely to be daycounted if the top of the period fraction is a number ("30" rather than Actual), if the coupon is "fixed", or if the product is "bond".
But there are many counterexamples to these heuristics. U.S. Treasies that pay fixed coupon use ACT/ACT daycount to calculate accrued coupon during the coupon period, but full coupons are not daycounted. Mexican treasuries (MBONO Govt and MUDI Govt on Bloomberg) pay fixed coupon, but are daycounted. Etc ad infinitum.
The coupon is very likely to be daycounted if the coupon is "floating" or if the product is "swap" or "loan" (or some loan-linked instrument, like a loan participation note (LPN)).
Some bonds (usually perpetuals, but not all perps do this, and some non-perps do this) have a "stacking" feature - if the coupon date is bumped due to a non-trading day, e.g. from 17th to 18th, then the accrual is adjusted, but the following coupons roll on the 18th's until they get bumped again. You can't guess this - you must read the prospectus.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.