Key Coupon Interest of function in refers an optional boolean that determines whether any intermediate coupons between the settlement and horizon dates are assumed to earn interest or not.
This setting affects the calculated forward price and therefore the carry of a bond, as well.
The default is TRUE, which means the following:
For simplicity, assume a single coupon amount c being paid to the bond holder at time T between the settlement date Tˢ and the horizon date Tʰ
Assume an initial spot settlement amount Sˢ as of Tˢ
Then the corresponding terminal invoice amount Sʰ is calculated as:
Sʰ = Sˢ(1+rΔ) - c(1+rδ), where
Δ = Tʰ - Tˢ and δ = Tʰ - T in annual units according to the daycount convention of the repo rate r
A FALSE setting is equivalent to assuming r = 0 in the above formula.