Eagle Accounting provides the flexibility for you to define amortization rules at the following levels based upon the taxability of the security, giving you a hierarchical approach to apply the amortization rules:
Accounting Basis level
Processing Security Type level
Amortization Accretion Rule Type level
Security ID level
Tax Lot level
Eagle Accounting also allows you to establish separate amortization rules for Market Premium and Market Discount Premium at an Accounting Basis level, at a Processing Security Type level, and/or at a Security ID level. Additionally Eagle Accounting allows you to even further establish separate amortization rules based on whether the security is taxable or non-taxable. For example, you can establish an amortization rule for all taxable bonds bought at market premium in an accounting basis to behave in a certain way.
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When you elect Average Cost as the Cost Method, you are also selecting Average Cost Amortization for your fixed income securities. Average Cost Amortization is defined as calculating amortization at the position level of a Primary Asset ID, and then applying the calculated amortization at the Lot level, based on the percentage of total par.
Eagle Accounting calculates the amortization at the position level as opposed to the lot level. Using Trade and Security Master File details, position-level quantity, Unit Cost Average Local (tag 124), and book value are calculated. The effective yield is derived from these calculations and utilizes the discount rate for computing the present value of all future principal and interest payments made by a debt instrument, to produce an amount equal to the cost of the debt instrument. Once the yield is calculated, an amortization schedule is laid out for the position and the daily and LTD amortization is calculated. The amortization is then applied to individual lots based on the percentage of lot/total position shares.
Lot details are ignored in an average cost environment, so Eagle Accounting aggregates the settled lots to determine effective yield. Eagle Accounting calculates an exclusive position yield curve based on the elected amortization methodology and determines a schedule and speed through maturity to which the position will amortize. Although the calculations are the same, the process differs from that of Identified (ID) Cost; where the yield calculation, schedule, and speed are determined at the lot level.
When
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processing average cost amortization, Eagle supports only the following amortization methods:
Straight Line
Straight Line/Actual
Constant Yield 1 (CY1)
Constant Yield 2 (CY2 with smoothing)
Level Yield 1 (LY1)
Level Yield 2 (LY2 with smoothing)
None
Also, because amortization is calculated at a position level (rather than at a lot level) as identified cost, the following options are not available for average cost portfolios: Retrospective Amortization, Amortization Schedule Override, and Lot Level Amortization Rule Override. And the following amortization rule options are not available:
Premium Proportional
DeMinimis Test Application
Amortization Cap/Floor Method
Amortization / Accretion Election
Recognize OID
Premium Proportional
Amortization at Disposition
Use User Defined Amortization Schedule
Therefore, when setting up an amortization rule for an Average Cost portfolio, you should set the rule as follows:
Amortization Methodology should be set to Default or Prospective. Retrospective and PAC NPV method are not eligible for average cost amortization.
Amortization Method should be set to a viable method if you wish to amortize, or None if you do not wish to amortize
Amortization/Accretion Election should be set to Both if the Entity/Accounting Basis will amortize, None if the Entity/Accounting Basis will not amortize
Amortization Cap/Floor Method should be set to No Restriction
Recognize OID should be set to No
DeMinimis Test Application should be set to None
Amortization at Disposition should be set to No
Use User Defined Amortization Schedule should be set to No
Average Cost Amortization Example
For example, if three lots are purchased with the following security Information:
Coupon Rate | 5% |
Issue |
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Date | 1/1/2002 |
Dated |
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Date | 1/1/2002 |
First Coupon Date |
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7/ |
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1/2002 |
Last Coupon Date |
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7/ |
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1/2006 |
Maturity Date |
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1/ |
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1/2007 |
Lot 1
Trade Date |
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1/ |
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1/2003 |
Settle Date |
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1/ |
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1/2003 | |
Par | 1,000,000 |
Price | 97 |
Lot 2
Trade Date |
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1/ |
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1/2003 |
Settle Date |
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1/ |
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1/2003 | |
Par | 3,000,000 |
Price | 100.875 |
Lot 3
Trade Date |
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1/ |
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1/2003 |
Settle Date |
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1/ |
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1/2003 | |
Par | 50,000 |
Price | 95 |
Additional Details
Total Par: | 4,050,000 |
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Total Cost: | 4,043,750 |
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Total Discount: | 6,250 |
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(Total Par - Total Cost) | |
Days from Settlement to Maturity: | 1,461 |
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Daily Amortization: | 4.28 (4.277891854) (Total Discount/Days from Settlement to Maturity) |
Lot
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Breakdown
Lot 1 |
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1,000,000 / 4050000 = | 0.24691358 |
0.24691358 * 4.28 = | 1.06 rounded to 2 decimal places |
Lot 2 | |
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3,000,000 / 4,050,000 = | 0. |
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74074074 | |
0.740740741 * 4.28 = | 3.17 |
Lot 3 | |
50,000 / 4,050,000 = | 0. |
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04222222 | |
0.042222222 * 4.28 = | 0.05 + .01 to facilitate rounding of the multiple lots |