An entity purchases 100,000,000.00 of a U.S. TIP; CUSIP 9182727R8. This security pays a semiannual Inflation Adjusted Coupon payment at 3.5%. It has an Actual/Actual Day Count Basis and pays coupons on January 15th and July 15th. The open transaction has a Trade Date of 01/02/07 and Settlement Date of 01/02/07. The opening Unit Price is 100.00 and the ILB Index Ratio is 1.15941. The Inflation Adjusted Shares are 115,941,000.00. The Traded Interest on the open transaction is 1,885,616.54, and is calculated as follows:
((Nominal Shares * ILB Index Ratio * Coupon Rate) / Payment Frequency/Actual Number of Days in the Period) * Number of Days Earned in the Period
or
100,000,000 * 1.15941 * .035 /2/184 (Number of Days in the Period from 7/15/06 to 1/15/07) * 171 (Number of Days in the Period from 1/15/07 to 7/15/06) = 1,885,616.54
The 100,000,000.00 nominal shares is then fully closed out with a trade date of 01/03/07, a settlement date of 01/03/07, and at a price of 100.00. The close ILB index ratio is 1.15936 and the traded interest is 1,896,643.53. In this scenario, the entity needs to recognize <5000.00> of deflationary ILB income. This is calculated as follows:
(100,000,000.00 * (1.15936 - 1.15941) Plus 1 Day of Accrued Interest, 10,945.20
(1,896,561.74 Interest Sold - 1,885,616.54 Interest Purchased by Settlement Date Minus 1)
In this scenario there are two options to recognize the income.
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