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Suppose we are seeking to value two swaps, with tenors of 2Y and 3Y with start dates on 30 Aug 2021 and semi-annual payments.

I want to calculate the schedule of payments on the fixed leg.

Consider the 2Y swap. The termination date is start+2Y so 30 Aug 2023 which is not an end of month date. We generate flows by stepping back in 6M intervals to 28 Feb 2023 and so on ...

Consider the 3Y swap. The termination date is start+3Y so 30 Aug 2024 which is not an end of month date. We generate flows by stepping back in 6M intervals to 29 Feb 2023, (it's a leap year) and then 29 Aug 2023 and so on ...

The payment dates in August 2023 do not align. They are on the 29th and 30th.

However Bloomberg finds that 30 August 2023 is a payment date for both swaps and we all know that Bloomberg is always right.

This is a fairly unusual case - the fact that I have chosen as start date 30 Aug which is a 30 and not an end-of-month, and that Feb is 6 months earlier, and there is a leap year in 2024 together exposes this issue.

So what is the rule that ensures that stepping back 6M from the 29 February 2024 lands on the 30th August 2023 ?

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  • $\begingroup$ I think that you do not step from date to date, but in 6M multiples from the last date. Hence you’d have 2024-08-30,2024-02-29, 2023-08-30 and so on. $\endgroup$ Aug 27 at 16:38
  • $\begingroup$ Yes. That makes sense. $\endgroup$
    – Dom
    Aug 27 at 19:21
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Matching the dates of a swap leg, bond, or loan schedules generated by different systems and libraries and explicitly specified in term sheets is usually straightforward, but sometimes hard.

For a swap, we typically see the accrual date, the first coupon date of each leg, and the maturity date. For example, we might see something like:

Termination / Maturity date: 15 January 2025

Leg 1

Effective / Accrual / Dated / Interest Commencement Date: 15 January 2021

First Swap Payment Date: 15 April 2021

Daycount basis: Quarterly, Actual / 360

Leg 2

Effective Date: January 15, 2021

First Swap Payment Date: July 15, 2021

Daycount basis: Semi-annually, 30 / 360

And for a bond / loan / note, we typically see something like:

Interest Payment Dates:

Semi-annually, each 15 January and 15 July in each year; the first such Interest payment Date being 15 July 2021 and the last such Interest Payment Date being 15 January 2025 / Maturity date.

but sometimes I've seen stranger bond schedules like:

Quarterly, each 15 January, 16 April, 15 July and 14 October in each year; the first such Interest payment Date being 15 July 2021 and the last such Interest Payment Date being 15 January 2025.

(OK, not quote this, but almost as weird). Or:

15 October, 15 November, 15 December and 15 January in each year; the first such Interest payment Date being 15 October 2021 and the last such Interest Payment Date being 15 January 2025.

(the 9-month float coupon reset from 9-month rate, while the 3 1-month coupons were reset from 1-month rates)

It's fairly common for the first and/or last coupon periods to be odd (short or long). Odd coupon periods in the middle are much less common.

As a general principle, it would seem like a good idea that whatever we see on the term sheet to a user interface and library.

Problem is, sometimes these things are a little ambiguous. E.g. are the days you see on the sheet already adjusted for weekends and holidays?

E.g. if the maturity is 16 August 2021 (Monday), could the dates be marching backwards from 15 August 2021 (Sunday) rather than from the adjusted maturity date?

For almost all instruments, the adjustment does not "stack". However a few instruments (all the examples I've seen are perpetual bonds), the adjstments "stack". For example, if a 3-month coupon starts accruing on 15 January and is paid not on 15 April, but on 16 April, because 15 April is a Sunday - then the next coupon in such a bond is not shorter by a day, but pays on July 16.

I've seen two possible approaches:

  • have a "roll day of the month" attribute of the schedule, similar to rolling on an end of the month. If you're marching from April 30 in any direcction, don't guess, but actually require the caller to specify whethey the roll rule is the 30th or month end. For example, a schedule starting on the 15th, rolling on the 30th (or on month end), and maturing again on the 15th, will have odd first and last periods, and might be on the 28th or 29th in February's.

  • If the instrument pays more than 1 coupon, then specify the (unadjusted) penultimate coupon date and march backwards from it. Or, if the instrument pays at least 1 coupon, then specify the (unadjusted) first coupon payment date, and march forward. (Whether you should always specify first and penultimate coupon dates, which are usually redundant, is a deep philosophical question.)

(Also allow to pass a flag for 'stack')

And I haven't even touched on Mexican, Russian, etc convention to pay coupons every 13 / 26 / 52 whole weeks instead of whole months.

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    $\begingroup$ Thanks Dimitri. This is true but I think @kermittfrog solved it in his comment above. $\endgroup$
    – Dom
    Aug 28 at 22:04
  • $\begingroup$ Thanks. I may add to my answer later in hopes that it might help someone. $\endgroup$ Aug 28 at 22:19
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    $\begingroup$ That might help. It's impossible to find a reference that explains this fully. Even ISDA documents are a bit vague. And it's the core code that was written years ago that quants never usually bother to study. $\endgroup$
    – Dom
    Aug 28 at 22:21

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