Several default bond examples follow.
Example 1: Bond Goes into Default Mid-Coupon Period
Once you are notified that a bond is in default, and you set up a debt default period rule, then the next time the system runs the earnings process, Eagle Accounting does not process earnings, as prescribed in the debt default period rule, for that day going forward. If the effective day of the debt default period rule was at the start of the coupon period, Eagle Accounting then zeroes out the period-to-date numbers for earnings based on the streams of income that are (chosen) not to be recognized.
For example, if you set up the debt default period rule to shut off both streams, Eagle Accounting zeroes out the period to date numbers for accrual and amortization the next time earnings is invoked.
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Rolling back of income refers to the Earn Through Date or Trade Date of earnings for a position, and not the Accounting Date of a position. Eagle Accounting can roll back earnings to the Trade Date of the earnings, and if that period is closed, Eagle Accounting applies earnings to the current accounting period. |
Example 2: Bond Goes into Default in Previous Coupon Period
You earned past a coupon date and do not receive the income for the security because the issuer is in default. You want to set up a debt default period rule for the prior period, that does not recognize the income for that prior period. You then roll back earnings to the effective date for any date in the previous coupon period, and then roll forward. If you set up the debt default period rule to not recognize income, the system creates no coupon for the coupon period.
Example 3: Bond Goes into Default in First Coupon Period of Ownership
You purchase a bond and the bond goes into default. You set up the debt default period rule with the Default Begin Date field equal to the start of the coupon period and set the Default Type to Both. You then invoke earnings for a date in that coupon period, Eagle Accounting zeroes out the Accruals, and Amortization but not the Traded Interest Purchased. You then must make a decision about how to handle the interest purchased, and based on this decision, perform the appropriate manual transaction.