# Bond vs Swap Cashflows **URL:** \ **Category:** Qlang Financial Libraries\ **Created:** [February 10, 2026, 7:06am UTC](https://quantlab.discourse.group/t/bond-vs-swap-cashflows/122 "2026-02-10T07:06:32Z")\ **Posts on this page:** 1\ **Page:** 1
**Author:** ![QuantBob](https://yyz1.discourse-cdn.com/flex003/user_avatar/quantlab.discourse.group/quantbob/32/9_2.png) [@QuantBob](https://quantlab.discourse.group/u/QuantBob)\ **Post date:** [February 10, 2026, 7:06am UTC](https://quantlab.discourse.group/t/bond-vs-swap-cashflows/122/1 "2026-02-10T07:06:32Z")
# Bond vs Swap Fixed Leg: The Devil in the Cashflow Details When pricing asset swaps or building fixed income analytics, it’s easy to assume that a swap’s fixed leg and a bond with the same coupon rate will produce identical cashflows. In practice, subtle convention differences mean the cashflows diverge slightly - and these details matter for accurate pricing. ## The Key Differences ### 1. **Business Day Convention** - **Bonds** : Typically use **FOLLOWING** - if a payment date falls on a non-business day, move to the next business day (even if it crosses into the next month) - **Swaps** : Typically use **MODIFIED FOLLOWING** - move to the next business day UNLESS that crosses into a new month, then move backwards to the previous business day **Why this matters** : If March 30 falls on a weekend and April 1 is the next business day: - Bond with FOLLOWING: Pays April 1 (crosses month boundary) - Swap with MODIFIED FOLLOWING: Pays March 29 (stays in original month) This creates different payment dates and different accrual periods between instruments that theoretically should match. ### 2. **Day Count Conventions** - **Bonds** : In Sweden often **30E/360** or **30/360** (assumes 30-day months). Intl often Act/Act. - **Swaps** : Fixed leg commonly uses **30/360** , but the specific variant matters (30/360 vs 30E/360 vs ACT/360) ### 3. **Stub Period Handling** - **Bonds** : First/last coupon may be irregular; accrual follows bond indenture rules - **Swaps** : Stub calculations can differ (short first, long first, etc.) based on swap template ### 4. **Interest Accrual Rules** - **Bonds** : `IR_MATURITY_NOADJ` - accrual to unadjusted maturity - **Swaps** : Can use `IR_MATURITY_NOADJ` or `IR_MATURITY_ADJ` - affects final coupon ## Real Example: Swedish Government Bond Asset Swap Here’s actual output from pricing a Swedish 3.5% 2039 bond (SE1053) traded on 2026-02-10 with a matching fixed-for-floating swap: | Bond Calc Date | Bond Pay Date | Bond Flow | Swap Date | Swap Flow | Notes | | --- | --- | --- | --- | --- | --- | | 2026-03-30 | 2026-03-30 | 35,000.00 | 2026-03-30 | -4,666.67 | Stub period from trade date | | 2027-03-30 | 2027-03-30 | 35,000.00 | 2027-03-30 | -35,000.00 | Perfect match | | 2028-03-30 | 2028-03-30 | 35,000.00 | 2028-03-30 | -35,000.00 | Perfect match | | 2029-03-30 | 2029-04-03 | 35,000.00 | 2029-03-29 | -34,902.78 | **Different adjusted dates!** | | 2030-03-30 | 2030-04-01 | 35,000.00 | 2030-03-29 | -35,000.00 | Different pay dates, same accrual | | 2031-03-30 | 2031-03-31 | 35,000.00 | 2031-03-31 | -35,097.22 | Same pay date, different accrual | | 2032-03-30 | 2032-03-30 | 35,000.00 | 2032-03-30 | -35,000.00 | Perfect match | | 2033-03-30 | 2033-03-30 | 35,000.00 | 2033-03-30 | -35,000.00 | Perfect match | | 2034-03-30 | 2034-03-30 | 35,000.00 | 2034-03-30 | -35,000.00 | Perfect match | | 2035-03-30 | 2035-03-30 | 35,000.00 | 2035-03-30 | -35,000.00 | Perfect match | | 2036-03-30 | 2036-03-31 | 35,000.00 | 2036-03-31 | -35,000.00 | Same adjustment | | 2037-03-30 | 2037-03-30 | 35,000.00 | 2037-03-30 | -35,000.00 | Perfect match | | 2038-03-30 | 2038-03-30 | 35,000.00 | 2038-03-30 | -35,000.00 | Perfect match | | 2039-03-30 | 2039-03-30 | 1,035,000.00 | 2039-03-30 | -35,000.00 | Final principal payment | ### What’s Happening Here? **First payment (2026-03-30)**: - Bond: Full 35,000 coupon (bond accrues from issue date 2000-03-30). Typical in Sweden. Bonds generally can have either full copupon or a proportional first cpn. - Swap: Short stub from trade date 2026-02-10 → 2026-03-30 = ~48 days - Stub calculation: 35,000 × (48/360) ≈ 4,667 **2029-04-03 vs 2029-03-29 - The Critical Divergence** : - Calculation date: 2029-03-30 (falls on Friday before Easter weekend) - **Bond (FOLLOWING)**: Adjusts to 2029-04-03 (next business day, crosses into April) - **Swap (MODIFIED FOLLOWING)**: Adjusts to 2029-03-29 (can’t cross month, goes backward to Thursday) - Different payment dates = different accrual periods = -34,902.78 vs 35,000.00 - **This is the classic FOLLOWING vs MODIFIED FOLLOWING divergence** **2030-04-01 vs 2030-03-29** : - Calculation date: 2030-03-30 (Saturday) - Bond: 2030-04-01 (FOLLOWING) - Swap: 2030-03-29 (MODIFIED FOLLOWING - can’t cross month boundary) - Despite different payment dates, cashflows match at 35,000 (accrual periods align) **2031-03-31 - Same Adjusted Date, Different Accruals** : - Both instruments adjust to 2031-03-31 - But different accrual calculation rules create -35,097.22 vs 35,000.00 difference - Shows that even matching payment dates don’t guarantee matching cashflows! ## The Code ```cpp // Setup: Swedish market curves vector(number) years = [1,2,3,4,5,8]; vector(number) ois_rates = [2.0,2.100,2.364,2.38,2.514,2.88]/100; vector(number) disc_factors = exp(-ois_rates .* years); vector(number) fwd_rates = [2.04,2.28,2.44,2.6,2.75,3.07]/100; disc_func df = disc_func_interp(years, disc_factors, ip_linear(), rate_type.RT_CONT); fwd_func fwd = fwd_func_interp(years, fwd_rates, ip_linear()); // Bond definition - Swedish government bond conventions INSTR_TMPL.bond_def_tmpl bond_swe_govt = new INSTR_TMPL.bond_def_tmpl( "SWE_BOND", bond_yld_method.ISMA, 1, // Annual frequency DC_30E_360, // 30E/360 day count false, "BD4", // FOLLOWING business day convention first_cpn_type.REG, last_per_yld_method.SIMPLE, next_per_yld_method.EFFECTIVE, odd_last_cpn_type.REG, "BD2", CAL_SE, // Swedish calendar "SEK", quote_style.YIELD_PCT ); // Create the bond bond b = bond( instr_def_bond(bond_swe_govt), "SE1053", #2000-03-30, // Issue date null, null, null, #2039-03-30, // Maturity 0.035, // 3.5% coupon trade_d, // Trade date = "today" (2026-02-10) null, null, null, null ); // Swap definition - matching tenor and rate INSTR_TMPL.swap_fixflt_def_tmpl fixflt_swe = new INSTR_TMPL.swap_fixflt_def_tmpl( "SWE_FIXFLT", "BD2", null, null, 1, // Annual fixed leg DC_30E_360, // Same day count as bond interest_rule.IR_MATURITY_NOADJ, "SEK", CAL_SE, BD_MOD_FOLLOWING, // MODIFIED FOLLOWING - key difference from bond! false, 4, 4, // Quarterly floating leg DC_ACT_360, // ACT/360 for floating interest_rule.IR_MATURITY_NOADJ, "SEK", CAL_SE, BD_MOD_FOLLOWING, // MODIFIED FOLLOWING on floating leg too false, null, null, null, null, null, INSTR_TMPL_IR_INDEX.stibor_3m ); // Create swap with same maturity and coupon as bond swap_fixflt swp = swap_fixflt_plain( fixflt_swe, "Myswap", trade_d, // Same trade date null, null, b.maturity(), // Match bond maturity b.coupon_rate(), // Match bond coupon (3.5%) -1, // Pay fixed (receive floating) 1E6, // 1M SEK notional true, df, fwd, null ); // Extract cashflows vector(date) b_calc_dates = b.cash_flow_dates(true, false); vector(date) b_pay_dates = b.cash_flow_dates(true, true); vector(number) b_flows = b.cash_flows(1E6, true); vector(date) swp_dates; vector(number) swp_flows; swp.payment_data_fix_leg(true, false, swp_dates, cpn_rate, swp_flows, pv_cpn_cashflow, fee, pv_fee, notional); ``` ## Why This Matters 1. **Asset Swap Pricing** : The spread adjustment needs to account for these cashflow mismatches 2. **Hedging** : A naïve 1:1 hedge will have small cashflow timing/amount mismatches 3. **Risk Management** : Your DV01 calculations differ slightly between bond and swap 4. **P&L Attribution** : Unexplained P&L often comes from these convention differences ## Practical Implications When building an asset swap: - **Don’t assume** fixed leg = bond cashflows - **Do align** day count conventions where possible - **Do track** the adjustment spread that compensates for convention differences - **Do test** edge cases: leap years, business day adjustments, stub periods The difference between theory (perfect cashflow match) and practice (convention-driven mismatches) is exactly where quantitative finance gets interesting! [test flows extended.qlw](https://quantlab.discourse.group/uploads/short-url/2edXCnXDg4DMG3v0CHpUk9sThon.qlw) (29.7 KB)