What is a ‘range accrual’
The range accrual or accrual range note, is a type of financial derivative products, where to earn, or accrue, on the rate of the coupon depends on the value of the index. The index can be interest rate, currency exchange rate, the price of a commodity or stock index. If the index value is within the specified range, the accrued coupon or accrued interest. If the index is outside the specified range, the coupon rate does not accumulate.
Other names include for this tool include the accretion of the range of bond index note, bond corridor, corridor, note, float range, a fairway bond.
Breaking down the ‘calculation range’
An investor holding a range of security accruals desires the index to remain within a specified range results range accrual to maturity. This strategy is a bet on stability or low volatility on the market index, and the investment in the note. Since cash is not guaranteed, said the coupon rate is often higher. For investors believing that the market index does not move as quickly as possible, the yield curve futures contango or geopolitical news could mean is a way to increase profitability.
Because it has a fixed rate coupon, range accrual qualifies as a fixed income security, but really in name only. The other name of coupon is conditional coupon from the payment of income depends on another event or condition. The calculation of the payment periods, usually daily. Because the actual interest payments may be zero for any given design return period, the real income is not necessarily fixed.
No formal market for the accrual notes trading range, or evaluation. Evaluation becomes even more tricky with the offer of the savings that include call function and dual range accrual. Double the charge range, which uses two indexes, for example, based on the exchange rate and interest rate.
Calculate number of charges
Notes the calculation of the number of start with the same calculations with any fixed income security, which coincided with the period of payment. The payments can be monthly, semiannually or annually. The inclusion of “Yes” or ” no ” type of modifier is the main difference between the securities.
Suppose an investor holds a 3% coupon for one year with a monthly payment in January. Underlying security index at the price of crude oil trading in new York range from $60.00 and 61.00 per barrel. Further, assume that oil is trading in a price range for 15 of the 31 day of the month.
- 3.00% * 15/31 * 1/12 = 0.121%
Interest payments on February 1 will be 1.45% of the top value divided by 12.
Repeat the calculation for all other months.
For February, payable on March 1, with index within range for 20 days, it will look like the following:
- 3.00% * 20/28 * 1/12 = 0.179%
In annual terms, monthly payments in the range from 0 to 3.00%.
If the index remains in the range of a month:
- 3.00% * 1 *1/12 = 0.250%