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You can configure LUSID to compound interest for the following instruments that have a floating leg (see all instruments):

  • InterestRateSwap (also InterestRateSwaption)
  • ComplexBond with a FloatSchedule
  • CapFloor
  • EquitySwap
  • FundingLeg

You should do this if there are multiple reset rates in a payment period, for example an interest rate swap that references an overnight index such as SOFR Index but pays quarterly. If you do not, LUSID expects one reset rate per payment period.

To compound interest, specify the Compounding object in the economic definition of an instrument, and choose one of the following compound methods:

CompoundingMethod fieldExplanationAdditionally set...Do not set...
AveragingCalculates an arithmetic average of the reset rates in the payment period.The AveragingMethod field to Weighted to calculate an average weighted by the number of days the rate is applicable for, or else Unweighted.The SpreadCompoundingMethod field
CompoundingCalculates a compound rate from the reset rates in the payment period.

The SpreadCompoundingMethod field to:

 

  • Straight to include the spread in the rate used in each compound period. That is, in each compound period, the rate used to calculate current period interest, and for compounding prior period interest, is the sum of the reset rate and the spread. Defined as 'Compounding' in the 2006 ISDA Definitions.
  • Flat to not include the spread in the compounding rate, but instead use the spread for simple interest in each compound period. That is, in each compound period, interest is accrued at a rate which is the sum of the reset rate and the spread, and interest accrued from prior periods is compounded at the reset rate (without the spread). Defined as 'Flat Compounding' in the 2006 ISDA Definitions.
  • SpreadExclusive to not include the spread in the compounding period, but instead use the spread for simple interest for the whole accrual period. That is, in each compound period, the rate used to calculate current period interest, and for compounding prior period interest, is the reset rate. The spread is then applied for the entire accrual period without compounding.
The AveragingMethod field
CompoundedIndexCalculates a compound rate from a pre-computed compound index such as SOFR Index.The SpreadCompoundingMethod field to SpreadExclusive.The AveragingMethod field
Keywords: interest rate