Every now and then an Assiduous Reader writes in and says he can’t reproduce my reported yield calculation; most recently this has happened with RY.PR.Y.<\/p>\n
The yields reported on PrefBlog are taken right off the HIMIPref™ analytical software<\/a>, which contains approximations of various kinds that make the analysis a little easier to perform. It should be noted, as an aside, that reported yields are not directly a particularly large component of the valuation that goes into HIMIPref™’s trade recommendation: as discussed on the software’s site, the big driver is price disparity – the estimate of the price change required to put the issue back on self-consistent yield curve where it belongs.<\/p>\n There are a number of reasons why the reported YTWs may be irreproducible:<\/p>\n maturityNoticePeriod<\/b>: As pointed out by my correspondent, I am calculating the yield to 2014-12-24, when in fact the redemption option is for 2014-11-24. This is the maturityNoticePeriod for a call. In the early days of the programme, with lots of instruments trading in excess of their current call price, I was getting too many violently negative returns that had knock-on effects on the rest of the analysis. In order to alleviate these difficulties, I introduced maturityNoticePeriod and set constraints; it is assumed that a redemption will not take place for a certain number of days after the date in the database. In the case of options of the type OPTION_TYPE_CALL<\/a>, the effective constraint is MATURITY_NOTICE_PERIOD<\/a>, currently set equal to 30.<\/p>\n At some point I really should introduce a sub-type of call, that will reduce maturityNoticePeriod to zero under certain circumstances (e.g., last date of option period equal to the first; first date of option period more than n<\/i> days in the future). However, I haven’t done this yet because:<\/p>\n Fortuitously, an example of the behaviour that triggered this analytical adjustment was reported April 30<\/a> in the volume table: CM.PR.A closed at 25.82-90, although it is currently callable at 25.50. The reported YTW of -9.75% to May 30 is bad enough; without the adjustment it would have been ridiculous.<\/p>\n Compounding<\/b>: I report yields as bond-equivalent; that is, first I calculate the IRR, which applies annual compounding, then I manipulate it to provide YTM, like so:<\/p>\n (1+YTM\/2)*(1+YTM\/2) = 1+IRR<\/p>\n CASHFLOW_ADJUSTMENT_FIRSTDIVIDEND<\/b>: Did you remember that there’s a fat first dividend?<\/p>\n CASHFLOW_FINALDIVIDEND<\/b>: There’s also a final dividend payable on redemption for the period between the last pay-date and the redemption paydate.<\/p>\n So, after doing all this, I report a YTW of 5.62% for RY.PR.Y. The report of the cashFlowDiscountingBox<\/a> has been uploaded, as well as the PseudoPortfolioReport<\/a>.<\/p>\n\n
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