It is common for fixed income holders to want to understand what contributes to their fixed income securities return. Hence, this project develops a framework to break down the return from the fixed income securities. Specifically, it is broken down as follows:
- Carry: this is the yield earned fixing the yield curve
- Pull-to-par: this is the market value movement as the portfolio slide down the yield curve
- Duration: this is the pnl from parallel interest rate/z-spread movement
- Convexity: this is the second order impact from the parallel interest rate/z-spread movement
- Residual: as the duration moves continuously with interest rate, the duration-convexity calculation is only an approximation, and there will be high order residuals. The residuals are expected to be small if the interest rate movement is small.
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