This was asked to me in my product control interview. What factors contribute to the daily pnl of a bond, if you exclude daily carry, price change and interest rate change? There would still be a pnl, what does it consist of?
It is an interview question. As opposed to finding the one right answer, I suggest you to prove that you have an idea about fixed income.
Discuss and systematically deal with topics like
- accrued interest (clean/dirty price),
- curve shape (rolldown for example),
- liquidity (bid/ask spread)
and what else comes to your mind to prove that all the concepts are there. All of those can result in a change of the P&L of the bond.
Cash flows, such as coupon payments.
Change in various curve marks, such as volatility curve if there are derivative products in the portfolio. Not too sure if there is a prepayment curve but if there is, then a change in the prepayment curve.
Changes in swap spreads.