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:
- 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.
- 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?
