Bond Total Return Swap


FinPricing offers:

Four user interfaces:

  • Data API.
  • Excel Add-ins.
  • Model Analytic API.
  • GUI APP.
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Bond TRS Valuation


FinPricing provides valuation models for the following fixed income TRS products:


1. Fixed Income Total Return Swap Introduction

A fixed income total return swap (TRS) is a financial contract where one party pays periodic interests based on a reference index plus spread and the other party pays all coupons plus the asset return. The Asset can be a bond, loan, backet of bonds/loans, or bond index.


A TRS has two legs: an asset leg and a floating leg. Commonly one party buys an asset from a counterparty and simultaneously enters into a TRS on this asset with the same counterparty. The asset is issued by an entity that is not related to the counterparty.


A fixed income TRS bears credit risk. A credit event can trigger the termination of the swap. The event includes bankruptcy, restructuring, or failure to pay.


2. Bond TRS Valuation

All coupons and other distributions (including notional repayments) received from the bond issuer are passed through to the counterparty with a lag (several business or calendar days) or at the next reset day.


Pricing a typical fixed income TRS must account for the possible termination of cash flows if the reference asset defaults or is called.


Sometimes, there is a replacement clause attached to the TRS. This asset replacement clause ensures that the counterparty continues to pay the cash flows if the asset is called or defaulted. In this case, early termination becomes uneconomical and credit risk can be ignored.

We develop a model for pricing fixed income TRS, which can flexibly include/exclude credit risk impact.