An account holds a position in Convertible Bond XYZ, with the following security attributes.
Long Term Debt Coupon Periods
Coupon
5.000000
Coupon Type Code
Fixed Rate
Day Count
...
Basis
30/360
Payment
...
Frequency
Semiannual
Issue Price
100.00000000
Issue
...
Date
19990115
Dated
...
Date
19990115
First Coupon
...
Date
19990715
Last Coupon
...
Date
20120115
Maturity
...
Date
20120115
Maturity
...
Price
100.00
Convertible
...
Indicator
Yes
Underlying Asset
...
ID
XYZ CORP EQUITY
Index
...
Offset
42.1052
The security has the following values as of the close of business on 2/1/04:
- Par = 1,000,000.00
- Amortized Cost = 1,633,193.83
- Accrual PTD = 2,361.11
On 2/2/04, there is a Mandatory Corporate Action to convert the bond into the underlying shares.
You have three options when setting up the corporate action record. You can:
- Allocate the accrued interest to the cost of the underlying security.
- Reverse the interest earned.
- Transfer the interest receivable to the resulting debt security and continue to accrue interest. This option can apply to a fixed income to fixed income exchange offer, but cannot apply to a fixed income to equity exchange offer.
Setup of the Exchange Offer corporate action is identical for both the Allocate and Reverse options to those above, except for the information contained in the Treatment of Interest Indicator field. To allocate the interest to the cost of the underlying security, select Allocate in this field; otherwise, select Reverse.
The following table describes your entries to allocate or reverse the interest.
Field | Record if Allocating Interest | Record if Reversing Interest |
|---|---|---|
Sweep Date | 20040202 | 20040202 |
Ex Date | 20040202 | 20040202 |
Record Date | 20040202 | 20040202 |
Announcement Date | 20040202 | 20040202 |
Pay Date | 20040202 | 20040202 |
Treatment of Fractional Shares | Post Fractional Shares | Post Fractional Shares |
Treatment of Interest Indicator | Allocate | Reverse |
Corporate Action Status | Released | Released |
Corporate Action Sub Priority | 1 | 1 |
Share Taxability | No | No |
Mandatory/Voluntary Indicator | Mandatory | Mandatory |
Cost/Proceed Flag | Proceed | Proceed |
To Asset ID | XYZ CORP EQUITY (EQ) (USD) | XYZ CORP EQUITY (EQ) (USD) |
To Issue Currency | USD | USD |
To Post Action Price | 0.04210520 | 0.04210520 |
Rate of Action | 0.042105200000 | 0.042105200000 |
Corporate Action Type | EXCHANGE OFFER | EXCHANGE OFFER |
If you set the Treatment of Interest Indicator to:
- Allocate. When the global corporate action is invoked, Eagle Accounting sells off the convertible bond at cost and interest accrued (Cost is 1,633,193.83 and Interest is 2,361.11), thus bringing the convertible bond down to zero par and zero cost.
- The common stock is created with 42,105.200000 Shares vs. a Cost of 1,635,554.94 (Amortize Cost + Interest).
- The Trade Date for both transactions is the Ex-Date of the corporate action, and
- The Settlement Date is the Pay Date of the corporate action.
- Reverse. Eagle Accounting sells off the convertible bond at cost and interest accrued (Cost is 1,633,193.83 and Interest is 2,361.11), thus bringing the convertible bond down to zero par and zero cost.
- The common stock is created with 42,105.200000 Shares vs. a Cost of 1,633,193.83 (Amortized Cost).
- The Trade Date for both transactions is Ex-Date of the corporate action, and
- The Settlement Date is the Pay Date of the corporate action.
- Transfer. The system transfers the interest receivable to the resulting debt security and continues to accrue interest.