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Valuing Bond TRS Asset Legs Versus Bond Forwards

Article Quant Q&A · Author: Mac
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Summary

The document asks how to value the bond-return leg of a total return swap and how that valuation differs from a bond forward. It focuses on coupon treatment: the TRS receiver gets the bond’s return, including coupons, while the forward buyer does not receive coupons during the contract. The author proposes comparing projected dirty prices and adjusting for coupon cash flows and accrued interest.

These expressions are presented as an initial intuition, not a demonstrated pricing method. The document gives no worked example, market inputs, financing assumptions, or settlement conventions, so it does not establish whether the proposed adjustments are complete or correctly timed. A full valuation would need to specify the contract terms and how coupons, carry, and accrued interest are handled over the relevant period.

Key ideas

  • A bond TRS asset leg and a bond forward treat interim coupon payments differently.
  • The document proposes valuing the TRS leg from a projected dirty bond price with an accrued-interest adjustment.
  • For a forward, it proposes deducting compounded coupons and maturity accrued interest from the projected price.
  • The proposed formulas are tentative and are not supported by a worked valuation.

Tags

Fixed incomeDerivatives pricing
Full text
# Bond Forward price calculation - TRS vs Bond Forwards


# Bond Forward price calculation - TRS vs Bond Forwards












I am trying to value a Bond Total Return Swap (TRS) asset leg (receive bond return) and understand how it differs from a Bond Forward.

I understand that the most vital difference would be due to the treatment of coupons (I receive them in TRS, vs no receipt in case of Bond Forwards). However, I am not able to pin-point exactly how both the legs would be valued.

My intuitive understanding is -

> TRS Asset leg: Project the spot dirty price of the bond till maturity - Accrued Interest

> Bond Forward: Project the spot dirty price till maturity - Coupons (compounded) - Accrued Interest (at maturity)

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.