Introduction to the calculation method of

ChinaBond Pricing System

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 Directory
I、Contribution Method of ChinaBond Yield Curve ...................................... 4

II. Calculation method of dirty price and valuated yield ................................. 5

1、Coupon bonds at the last interest payment period, discount bonds,

zero-coupon bonds and pay at maturity bonds with the repayment period

less than 1 year(including 1 year)： .......................................................... 5

2、Pay at maturity bonds and zero-coupon bonds with the repayment

period more than one year： ..................................................................... 5

3、Fixed rate bonds not at the last interest payment period （not including

serial bond）： ............................................................................................ 6

4、Floating rate bonds not at the last interest payment period （not

including serial bond）：............................................................................ 7

III、Calculation method of other bond valuation indicators .......................... 9

1、Accrued interest ................................................................................... 9

2、Clean price ......................................................................................... 10

3、Modified duration .............................................................................. 10

4、Convexity ........................................................................................... 10

5、Price value of a basis point ................................................................ 11

Ⅳ、Calulation method of Chinabond index ................................................. 11

1、Total Return Index ............................................................................. 11

2、Dirty Price Index ................................................................................ 12

3、Clean Price Index ............................................................................... 13

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Ⅴ、Calulation method of Chinabond VaR .................................................. 13

1、Calulation method of bonds’ VaR/CVaR .......................................... 13

2、Calulation method of bond portfolios’ VaR/CVaR ........................... 14

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I、Contribution Method of ChinaBond Yield Curve

ChinaBond Yield Curve is built by Hermite Model after

determining the yield at key term point according to the yield level of

the day. Theory and practices have proved that Hermite Model can

meet the requirements of smoothness, flexibility and stability.

Formula of Hermite interpolation Model ：

Assume that, and for each term xi is corresponding to yield yi . Thus ,

to get the corresponding yield y( x) to every term x, we can use the Hermite

interpolation formula below：

y( x)  yi H1  yi 1H 2  di H3  di 1H 4
xi 1  x 2 x x 3
H1  3( )  2( i 1 )
where
xi 1  xi xi 1  xi ；
x  xi 2 x  xi 3
H 2  3( )  2( ) ；
xi 1  xi xi 1  xi
( xi 1  x)2 ( xi 1  x)3
H3   ；
xi 1  xi ( xi 1  xi )2

( x  xi )3 ( x  xi ) 2
H4  
( xi 1  xi )2 xi 1  xi

xi : term

yi : yield

d i : slope

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II. Calculation method of dirty price and valuated yield

1、Coupon bonds at the last interest payment period, discount bonds,

zero-coupon bonds and pay at maturity bonds with the repayment

period less than 1 year(including 1 year)：

Dirty price (inter-day)：

FV
PV  ⑴
D
y 1
TY

where

PV ：dirty price (inter-day) of the bond,

FV ：amount of principal and interest paid at maturity,

TY ：number of days of interest-bearing year,

y ：valuated yield,

D ：number of days between valuation date and maturity.

2、Pay at maturity bonds and zero-coupon bonds with the repayment

period more than one year：

Dirty price (inter-day)：

FV
PV  ⑵
(1  y )t
where

PV : dirty price (inter-day) of the bond,

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FV : the amount of principal and interest paid at maturity,

y : valuated yield ,

t : repayment period.

3、Fixed rate bonds not at the last interest payment period

（not including serial bond）：

Dirty price (inter-day)

（take the method at value date as example ）：

C/ f C/ f C/ f M
PV     
1  y / f  1  y / f  1  y / f  ⑶
1 2 n

where

PV : dirty price (inter-day) of the bond,

C : coupon rate,

f : number of times of interest payment each year ,

y : valuated yield ,

M : par value,

n : rest number of times of interest payment.

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 4、Floating rate bonds not at the last interest payment period

（not including serial bond）：

Dirty price (inter-day)

（take the method at value date as example ）：

 (R  S ) / f ( R2  S ) / f 1  ( R2  S ) / f 
PV   1
  ......  n
M ⑷
 1  ( R2  yd ) / f  1  ( R2  yd ) / f  1  ( R2  yd ) / f  
1 2

where

PV : dirty price (inter-day) of the bond,

R1 : benchmark interest rate at the valuation day,

R2 : benchmark interest rate at the beginning of the interest-bearing period,

S : spread decided by auction,

f : number of times of interest payment each year ,

yd : valuated spread yield ,

M : par value,

n : rest number of times of interest payment.

5、Fixed rate serial bonds not at the last interest payment period:

Dirty price (inter-day)：

CF1 CF2 CFn
PV     ⑸
(1  y) (1  y)
t1 t2
(1  y)tn
where

PV : dirty price (inter-day) of the bond,

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CF1,2,,n : 1rd , 2nd ,, nth cash flow,

t1,2,,n : time between the valuation day and the day when 1rd , 2nd ,, nth cash

flow happen，

y : valuated yield .

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III、Calculation method of other bond valuation indicators

1、Accrued interest

100  Pd
AI  t
discount bonds and zero-coupon bonds： T ⑹
C
pay at maturity bonds： AI  K  C  t
TY ⑺
C t
coupon bonds with regular interest payment period：AI  
f TS ⑻
t
coupon bonds with irregular interest payment period： AI  C 
TY
⑼

where

AI : accrued interest of par value,

pd ：issue price,

T ：number of days between value date and maturity,

t ：number of days between valuation date and maturity,

C : annual interest of 100 par value, for floating coupon bonds, C is decided

according to the coupon rate of the current interest payment period,

K ： number of years between value date and maturity,

TY ：number of days of interest-bearing year，

f ： number of times of interest payment each year,

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TS ：number of days of the present interest-bearing period.

2、Clean price

Clean price =dirty price（inter-day）- accrued interest（inter-day）

= dirty price（end-day）- accrued interest（end-day）

3、Modified duration

dPV 1
Dur    ⑽
dy PV
where

Dur ：modified duration of a fixed rate bond,

PV ： dirty price（inter-day）,

y ： valuated yield at valuation day.

4、Convexity

d 2 PV 1
con   ⑾
dy 2 PV

where

con ：convexity of a fixed rate bond,

PV ： dirty price（inter-day）,

y ：valuated yield at valuation day.

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 5、Price value of a basis point

PV
BPV  Dur  ⑿
10000
where

BPV ： price value of a basis point,

Dur ： modified duration of a fixed rate bond,

PV ： dirty price（inter-day）.

Ⅳ、Calulation method of Chinabond index

1、Total Return Index

Approach 1:

Assumption: Investors put the interest and principal repayments into

index portfolio once they received the cash.

n Pi ,FT
I TR
T I TR
T -1   Wi F
Calculation equation： Pi ,FT -1 ⒀
i 1

where

ITTR
: Total Return index on date T,
Pi ,FT
: Dirty Price of bond i on date T,
Wi F
: Dirty -price weight of bond i.

Approach 2：

Assumption: When investors receive the interest and principal

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 repayments, they put them in the checking account until the end of the month.
Investors withdraw the money and invest them in the index portfolio on the
first business day of each month.

Calculation equation：

  F
 n
 P  PIN  INT MV F 

 CASH j ,T 1 

ITTR  ITTR-1    i ,T i ,T i ,T
 i ,T 1
 1  RT 1   j

 i 1 
F
Pi ,T -1 F 
j（MV j ,T 1  CASH j ,T 1） j（MV j ,T 1  CASH j ,T 1）
F

    ⒁

where

ITTR : Total Return index on date T,

Pi ,FT
: Dirty Price of bond i on date T,
PINi ,T
: Principal Repayment of bond i on date T,
INTi ,T
: Accrued Interest of bond i on date T,
CASH i ,T ：
As of date T, cash received from interest and principal repayment
reinvestment,
MVi ,FT 1
: Dirty-price Market Value of bond i on date T-1,
RT :Interest Rate of checking account.

2、Dirty Price Index

n Pi ,FT
ITF  ITF1   F
 Wi F
i 1 Pi ,T -1
⒂

where

ITF : Dirty Price index on date T,

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Wi F : Dirty -price weight of bond I,

Pi ,FT :
Dirty Price of bond i on date T.

3、Clean Price Index

n Pi ,NT
ITN  ITN1    Wi N
i 1 Pi ,NT -1
⒃

where

ITN :Clean Price index on date T,

Wi N :Clean-price weight of bond I,

Pi ,NT
: Clean Price of bond i on date T.

Ⅴ、Calulation method of Chinabond VaR

1、Calulation method of bonds’ VaR/CVaR

We use historical simulation model to calculate VaR.

Variable introduction：

Sig : Confidence level,

S : Holding period that is corresponding to a bond’s VaR,

M : Number of working days of the historical simulation period,

Pt
: Dirty price of the bond on calculation day,
Dt  s
: Repayment period when the holding period is over,
yCV
: Critical value of the change of the yield,
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Wt : Total market value of the bond portfolio on calculation day,

WCV : Critical value of the VaR of the bond portfolio.

Specific calculation method：

(1)Calculate the repayment period Dt  s after S days of holding period,

(2)Use the data of the yield curve which repayment period is Dt  s of M

working days before the calculation date, calculate the change value between

every 2 adjacent days; The system now set M=250,

(3)Rank the change value from large to small and calculate the quantile yCV

of 1  Sig ,

(4)Use the quantile to calculate the dirty price PCV of the bond,

(5)Thus we can calculate the bond’s VaR after S days under the confidence

level of Sig . VaR  Pt  PCV ,

(6)Calculate the bond prices that are corresponding to the largest 1  Sig   M

yield figure. The mean value of these prices is P . Thus the bond’s CVaR

after S days under the confidence level of Sig is CVaR  Pt  P .

2、Calulation method of bond portfolios’ VaR/CVaR

(1)Calculate the change value between every 2 adjacent days of each bond in

the portfolio according to their yield curve and then calculate each bond’s

prices that match every change value;

(2)Compute the market value of the portfolio according to each bond’s

market value and weight. Rank the portfolio’s market value and find the

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quantile WCV of 1  Sig ;

(3)Thus we can calculate the portfolio’s VaR after S days under the

confidence level of Sig . VaR  Wt  WCV ；

(4)Assume that the mean of the largest 1  Sig   M figures of the portfolio’s

market value is W , the portfolio’s CVaR after S days under the confidence

level of Sig is CVaR  Wt  W .

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