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How Bond Pricing Conventions Differ Across Major Markets

Article Quant Q&A · Author: olaker
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Summary

Nominal government bond pricing conventions vary across the US, UK, and euro area. The document identifies the Street convention in the US, the DMO convention in the UK, and the ICMA convention in the euro area, while noting that Germany also commonly uses the Moosmüller convention. Differences affect how discount-factor days are counted, which day-count basis is applied, and which calendar governs adjusted payment schedules.

Bond pricing also depends on instrument structure and market practice. Coupon frequency can vary, and fixed coupon bonds, zero coupon bonds, amortizing bonds, and floating-rate notes require different considerations. Quotation may use clean or dirty prices, and accrued interest depends on the selected day-count basis. The discussion is a high-level overview rather than a set of formulas or a worked comparison; it does not detail the calculations for each convention or cover inflation-linked bonds.

Key ideas

  • US, UK, and euro-area markets use different conventions for pricing nominal government bonds.
  • The cited conventions are Street, DMO, and ICMA, with Moosmüller also common in Germany.
  • Conventions differ in day counts for discount factors, day-count bases, and calendars for adjusted schedules.
  • Coupon frequency and bond structure affect pricing and accrued-interest calculations.
  • Clean or dirty quotation methods are another source of variation.

Tags

Fixed incomeDerivatives pricing
Full text
# How do bond pricing formulae differ between the US, UK and the Euro zone?


# How do bond pricing formulae differ between the US, UK and the Euro zone?












Let's restrict the scope of the question a little bit: I'm interested to learn about major differences in pricing formulae for nominal government bonds. The pricing formulae for inflation-linked bonds could well make a topic of another (and more difficult) question.

The question was previously asked by cletus during the definition phase of the site.

## Answer by fabien (score 7, accepted)

https://quant.stackexchange.com/a/1103

Well, that's still a very general question. A few elements of answer : Bonds pay interest on a regular basis, semiannual for US treasury and corporate bonds, annual for others such as Eurobonds, and quarterly for others. You need to distinguish between fixed coupon bonds, zero coupon bonds, bonds with an amortization schedule, floating rate notes based on LIBOR or equivalent, etc ... Different quotation methods are available (clean vs dirty especially), and the basis used to compute the accrual interest can differ as well.

## Answer by Oops (score 5)

https://quant.stackexchange.com/a/8166

US market uses the STREET convention. UK market uses the DMO convention. EUR market uses the ICMA convention (Germany uses also a lot MOOSMULLER convention).

The main difference between these conventions are: - the way the number of days is calculated for the discount factors - the day count convention used - the calendar used in case of adjsuted schedule.

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.