Marking a Treasury Bond Total Return Swap to Market
Summary
The question asks how to mark a total return swap on a single Treasury bond during its life, separating the bond performance leg, accrued coupon interest, and funding leg. It also asks whether the funding leg should use the full swap notional or the bond’s market value as its notional base. The trade example specifies a fixed funding rate and a later change in bond price and funding rates, but the proposed calculation is not fully resolved in the response.
The sole answer points to the Act/Act convention for accruing interest on Treasury notes. It does not confirm the performance or funding-leg formulas, explain the appropriate funding notional, or provide a complete mark-to-market framework. Accordingly, the useful takeaway is narrow: Treasury coupon accrual requires an appropriate Treasury day-count convention, while a full swap valuation needs additional specification of cash flows, discounting, and contract terms.
Key ideas
- A bond total return swap mark-to-market separates performance, coupon accrual, and funding cash flows.
- The response identifies Act/Act as the convention for Treasury note interest accrual.
- The response does not resolve which notional applies to the funding leg.
- A complete valuation requires details beyond the brief day-count answer.
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Full text
# Total Return Swap on Single Govt Bond Marked to Market Calculation # Total Return Swap on Single Govt Bond Marked to Market Calculation Looking to understand how to value a TRS on single 10y UST during the life of the trade. Here is an example of trade parameters. - 10mm constant notional - 1-year maturity - I am performance leg payer / funding leg receiver - Funding leg is a fixed rate at 0% - Dirty Bond Price at inception of trade is 99 - Underlying bond is a 10y UST with a 1% coupon - Trade was executed same day as coupon payment so 1 day from now = 1 day of accrued interest In one month from now: - Bond price is 98 - Funding rates are now at 0.10% Would this be correct MTM? - Accrued Interest = (10,000,000 * .01 * 30/365) = -8,333.33 pay to cpty - Performance = 10,000,000 * (98/100)-(99/100) = +100,000 due to me because I am performance leg payer (short the bond) - Performance Leg MTM = 100,000 - 8,333.33 = 91,666.67 - Funding Leg MTM = 10,000,000 * (0.10% * 30/365) = -833.33 against me because I locked in at zero so I am worse off by the 10bps increase in the funding rate? Total MTM = +91,666.67 - 833.33 = 90,833.33 Do you calculate the MTM of performance leg off the 10mm but the funding leg off the Funding notional (10,000,000 * 99/100)= 9.9mm? Really appreciate any guidance here. Thank you! ## Answer by Edward Watson (score 1) https://quant.stackexchange.com/a/63805 Act/Act for treasury note interest accruals
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