During processing, the system calculates amortization for a convertible bond bought at premium based on the Convertible Option Price Method defined for the amortization rule in effect for the lot, along with other criteria. You can choose a Convertible Option Price Method of Stated Redemption Price at Maturity (SRPM) or Embedded Equity Option Value.
About the SRPM Method
The Stated Redemption Price at Maturity (SRPM) methodology is for tax lots purchased at a premium and uses the target maturity price in the calculation of amortization yield. The SRPM is calculated as = conversion ratio x market value of underlying shares (that is, value of stock price) / 10. This amortization method takes into consideration the value of the stock as the target maturity price to calculate amortization yield. The system considers put and call dates and put and call prices along with maturity date and SRPM price in the calculation of yield according to the amortization rule elections. Puts and call logic is incorporated in the calculations of yields.
If you purchase a convertible bond at a premium and the security utilizes the SRPM method, after you click Submit, Eagle Accounting calculates the Stated Redemption Price at Maturity (that is, the market value of a share if converted to the underlying security) as part of the processing transaction. Eagle Accounting uses the Stated Redemption Price at Maturity (SRPM) as the target maturity price in the calculation of yield and amortization.
If you purchase the lot at a discount, Eagle Accounting does not calculate the Stated Redemption Price, and the SRPM is equal to the maturity price of the bond from the SMF record. Additionally, if a specific lot is bought at a premium and the calculation of SRPM is less than 100, Eagle Accounting forces the SRPM price to equal the redemption price of the security on the SMF record (in most cases this is 100). If the security has Put or Call features, and the entity recognizes calls and/or puts in the amortization rule, Eagle Accounting uses those values in the calculation of amortization yield. If the security has only Put features, Eagle Accounting amortizes to the Put Date and Price that calculates to the highest yield ("Yield to Best"); or if the security has only Call features, Eagle Accounting amortizes to the call Date and Price that calculates the worst yield ("Yield to Worst"), considered the most conservative). If a security has both Put and Call features, Eagle Accounting uses an iterative method to determine the most conservative yield. For details, see "Example: Determining Yield for a Schedule with Both Puts and Calls."
About the Embedded Equity Option Value Method
The Embedded Equity Option Value Methodology is also used for tax lots purchased at a premium. This method allows the convertible bond price to be separated from the convertible bond cost for the purposes of calculating the amortization yield. After separation of the embedded equity option value, if the resulting fixed income cost is at a discount, then discount should not be amortized if the combined amortized cost and the embedded option premium will exceed the bond's cash redemption value (that is, par in most cases). The system considers put and call dates and put and call prices along with maturity date and price in the calculation of yield according to the amortization rule elections. The following figures show shows the process by which the system calculates amortization for a convertible bond with the Embedded Equity Option Value method.
Figure 34: Convertible Bonds Workflow, Part 1
Figure 35: Convertible Bonds Workflow, Part 2
The following section shows the impact of different prices and call features on yield calculations in Eagle Accounting when you use the Embedded Equity Option Value (EEOV) convertible option price method with convertible bonds.
Maturity date = 4/15/2029
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Convertible bond price/ Cost
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Bond Value
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EEOV
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Call / Put
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Amortization To and From
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System Processing
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CV purchase at premium
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110.00
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105.00
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5.00
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No call / put.
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Amortize from 105 to 100.
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Amortize premium of $5 to maturity date by amortizing cost from $110 to $105.
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110.00
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105.00
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5.00
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Par call resulting in worst yield.
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Amortize from 105 to call date and price.
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Amortize premium of $5 to call date by amortizing cost from $110 to $105 (par call price + $5 embedded equity option value).
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110.00
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105.00
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5.00
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Call at 102 resulting in worst yield.
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Amortize from 105 to call date and call price of 102.
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Amortize premium of $3 to call date by amortizing cost from $110 to $107 (call price $102 + $5 embedded equity option value).
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110.00
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105.00
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5.00
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Put at 104 resulting in best yield.
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Amortize from 105 to put date and put price of 104.
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Amortize premium of $1 to put date by amortizing cost from $110 to $109 (put price $104 + $5 embedded equity option value).
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110.00
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105.00
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5.00
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Call and put feature - both at par.(1) Worst yield would be on call date (4/15/2020).(2) Best yield would be on maturity date.
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Rule would be to use earliest of the worst call date and price or best put date and price.In this case, earliest date would be worst call date so should amortize from 105 to call date and price of 100.
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Amortize premium of $5 to worst call date by amortizing cost from $110 to $105 (call price $100 + $5 embedded equity option value).
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110.00
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105.00
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5.00
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Call and put feature.(1) Call at 102 on 4/15/2020 resulting in worst yield.(2) Put at 104 on 4/15/2019 resulting in best yield.
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Use earliest of worst call date or best put date. Amortize from 105 to put date and price of 104.
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Amortize premium of $1 to best put date by amortizing cost from $110 to $109 (put price $104 + $5 embedded equity option value).
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110.00
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102.00
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8.00
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(1) Put at 104 on 4/15/2019 resulting in best yield (2) Put at 101 on 4/15/2020 resulting in second best yield.
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(1) Would not amortize discount from 102 to 104 since discount on the debt instrument should not be amortized if the resulting combined amortized cost and embedded option premium would exceed the amount collectible upon cash redemption. Eagle would need to bypass the best yield in this case and do not amortize from settlement date to put date of 4/15/2019. (2) If the put option is not exercised by 4/15/2019 (best yield date), then amortize to next best yield, which would be to amortize premium from 102 to 101 to next put date of 4/15/2020.
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Do not amortize discount to best put date of 4/15/2019.
If the put is not exercised on 4/15/2019, then:
Amortize premium of $1 to next best put date by amortizing cost from $110 to $109 (put price $101 + $8 embedded equity option value).
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CV purchase at premium. Clean bond value at discount.
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110.00
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95.00
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15.00
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With or without call / put.
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Do not amortize. No amortization on discount if the resulting combined (amortized) cost of the debt instrument and embedded option premium would exceed the amount collectible upon cash redemption of bond (par in this case).
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Do not amortize.
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CV purchase at par. Clean bond value at discount.
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100.00
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95.00
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5.00
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With or without call / put.
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Do not amortize. No amortization on discount if the resulting combined (amortized) cost of the debt instrument and embedded option premium would exceed the amount collectible upon cash redemption of bond (par in this case).
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Do not amortize.
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CV purchase at discount.
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90.00
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85.00
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5.00
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No call / put.
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Amortize from 90 to 100.
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Amortize discount of $10 to maturity date by amortizing cost from $90 to $100 (maturity price).
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90.00
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85.00
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5.00
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Have par call. Maturity date would be worst yield.
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Amortize from 90 to 100 (maturity date).
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Amortize discount of $10 to maturity date by amortizing cost from $90 to $100 (maturity price).
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90.00
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85.00
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5.00
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Have par put. Put would be best yield.
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Amortize from 90 to 100 (put date).
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Amortize discount of $10 to put date by amortizing cost from $90 to $100 (put price).
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90.00
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85.00
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5.00
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Call at 102. Maturity date would be worst yield.
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Amortize from 90 to 100 (maturity date).
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Amortize discount of $10 to maturity date by amortizing cost from $90 to $100 (maturity price).
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90.00
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85.00
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5.00
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Put at 104. Put date would be best yield.
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Amortize from 90 to 104 (put date and price). Resulting amortized cost, which includes the embedded option premium = 104 (cash redemption of bond on put date).
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Processing a Convertible Bond Buy Examples
Account CBDEMO is purchasing 1,000,000 par of XYZ Corp Convertible Bond (the bond set up previously in this section), with a Trade Date of 1/16/2004 and a Settlement Date of 1/17/2004, at a Price of 165.093 (purchased at a premium). Because the target amortization price is calculated after you submit the trade, the amortization yield and trade yield displaying on the panel do not reflect the impact of underlying price or embedded equity option value entered. After the trade is processed, Eagle Accounting calculates the amortization yield utilizing the SRPM or Embedded Equity Option Value.
The following table shows the values for the sample buy in the Open Debt Bond panel.
Entity Information | |
Entity ID(1163:S) | CBDEMO2 (CBDEMO2) |
Entity Name(1164:S) | CBDEMO2 |
Base Currency(86:S) | USD |
Issue Information | |
Trade Date(35:S) | 2004 11 16 |
Accounting Date(36:S) | 2004 11 16 |
Monthly Accounting Date(4733:S) | 2004 11 16 |
Settlement Date(37:S) | 2004 11 17 |
Event Type(55:S) | BUY |
Long/Short Indicator(15:S) | L |
Cross Reference Type(1234:S) | INTERNAL |
Issue Name(961:S) | XYZ CONVERTIBLE BOND |
Ticker(13:S) | mpsxyz |
Cross Reference ID(1233:S) | XYZ CONVERTIBLE BOND (INTERNAL) (XYZ CONVERTIBLE BOND) |
Instrument Type(11:S) | FI |
Security Type(82:S) |
|
Issue Currency(85:S) | USD |
Maturity Date(38:S) | 2012 01 15 |
Coupon Rate(70:S) | 5.000000 |
Convertible Indicator(1531:S) | Y |
Accounting Information | |
Select Values to be Calculated by STAR(7000:S) | Traded Interest/Amort Yield/OID Yield/Trade Yield |
Accrued Interest Type(3715:S) | CUM |
Par Value/Current Face(40:S) | 1,000,000.000000 |
Price(45:S) | 165.09300000 |
Amort Yield(75:S) | -3.060192856634 |
Trade Yield(9430:S) | -3.060192856634 |
OID Yield(39:S) | |
Principal(165:S) | 1,650,930.000 |
Implied Commission Indicator(78:S) | NO |
Commission(47:S) | 0.00 |
Tax Amount(46:S) | 0.00 |
Stamp Duty Tax(51:S) | 0.00 |
Other Fee(3752:S) | 0.00 |
Ex Interest Processing Flag(16311:S) | N |
Traded Interest(49:S) | 16,944.440 |
Local Net Amount(50:S) | 1,667,874.440 |
Settlement Currency(63:S) | USD |
Settlement Net Amount(64:S) | 1,667,874.440 |
Local to Base FX Rate(87:S) | 1.000000000000 |
Base Net Amount(478:S) | 1,667,874.44 |
Underlying Security Market Price(319:S) | 36.750000 |
Conversion Premium(5727:S) | |
Settlement Information | |
Settle Trade Indicator(58:S) | NO |
Broker Name(1235:S) | EAGLE |
Broker Code(88:S) | EAGLE |
Example 1: SRPM with Same Asset Currency
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