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?
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1$\begingroup$ ?? Cost of funding the position ?? $\endgroup$– Alex CFeb 5, 2017 at 18:06
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$\begingroup$ What about Trading Profit or "P&L of Bonds bought/sold today".(I am thinking of the portfolio of a Bond Dealer for example). $\endgroup$– nbbo2Feb 6, 2017 at 13:43
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$\begingroup$ does the bond bare credit risk? if so I'd say as time passes, you earn a bit of risk premium from there (due to survival) $\endgroup$– Will GuDec 5, 2017 at 0:07
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$\begingroup$ If the bond is in another curremcy, then you'll hav daily P&L from the exchange rate. $\endgroup$– Dimitri VulisMar 23, 2019 at 11:54
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2 Answers
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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),
- convexity,
- 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.
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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.