On fixed rate bonds and IBOR based floating rate notes the next cashflow is known definitively in advance, therefore the accrued interest for a given settlement date is a trivial calculation typically following something like:

$$ accrued = cashflow * \frac{settlement - period start}{period end - period start} $$

But for RFR FRNs the cashflow depends on all of the RFR published fixings within the coupon period. This creates two issues:

  1. Estimating the fixings mid-period is subjective and depends on curve construction and curve calibrating instruments which differs across counterparties, so the accrued would be subjective.
  2. Those estimates for the cashflow might change during the day leading to one purchase with one estimate, or recorded amount, of accrued interest and a sale with a different estimate or recorded amount. This would presumably be a nightmare to coordinate settlement with different amounts of accrued on the same bond in the same notional on the same settlement day.

Thus I'm assuming this cannot be the case and there is an official formula. Does anyone have any term sheet, link or first hand knowledge?

  • $\begingroup$ I must be confused - what difficulties arise hrre, that don't arise in a traditional overnight index swap? $\endgroup$ Feb 7 at 17:08
  • $\begingroup$ Related question, no answers yet quant.stackexchange.com/questions/51836 $\endgroup$ Feb 7 at 17:22
  • $\begingroup$ OIS are not securities that are processed through a settlement system. A traditional bond trades with a clean price and settles on that price plus accrued interest. If you were, for example, terminating an OIS part way through the period the two counterparties would explicitly derive a cashflow (as the NPV price) and that would be the settlement value. But an RFR FRN should have a clean price plus accrued. $\endgroup$
    – Attack68
    Feb 7 at 17:40
  • $\begingroup$ Thanks I understand now. ARRC paper newyorkfed.org/medialibrary/Microsites/arrc/files/2021/… discussed several approaches, I believe most SOFR FRNs use 2 business days "lookback with no observarion shift". $\endgroup$ Feb 7 at 17:54
  • $\begingroup$ This spreadsheet newyorkfed.org/medialibrary/Microsites/arrc/files/2020/… illustrates accrued calculation with 5 business days lookback. $\endgroup$ Feb 7 at 18:02


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