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In the Amortization & Accretion Rules panels, you can specify a value for the Amortization Rule Change Application (tag 9007) . This field controls how Eagle Accounting handles amortization rule changes, based on the amortization rule's begin and end date. Options include:

  • Prospective. Eagle Accounting calculates the amortization yield based on the book cost, as of the amortization previous End Date, and applies the new amortization rule going forward from the newly effective amortization rule Begin Date.
  • Retrospective from Original Settle Date. Eagle Accounting calculates the amortization based on the Original Settlement Date. It allows you to "true up" amortization based on the Original Settlement Date of the lots converted onto Eagle Accounting, and from the Settlement Date for lots purchased directly into Eagle Accounting. This option acts exactly like a Retrospective Amortization Calculation when you change the amortization rule based on an effective date.
    • Retrospective from Settlement Date. Eagle Accounting calculates the amortization based on the Settlement Date of the lot. It allows you to "true up" amortization based on the conversion date going forward on lots converted on to Eagle Accounting, and settlement date forward for lots purchased on to Eagle Accounting

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    Example: Retrospective/Prospective Amortization Rule Change

    The following security purchase was recorded in Eagle Accounting with the trade information that appears below. In this scenario, the entity was set up to use SL Amortization from 01/01/03, and then change to Constant Yield 1 on 01/01/04.

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    Scenario Data

    Trade Date: 

    Settle Date:

    Par: 

    Price:

    01/01/2003

    01/01/2003

    100,000

    97

    Field

    Value

    Coupon

    10.000000

    Coupon Type Code

    Fixed Rate

    Day Count Basis

    30/360

    Payment Frequency

    Semiannual

    Payment Frequency Code

    6_M

    Business Day Convention

     

    Day of Month Override

     

    Interest Payment Timing

    Same Day of Month

    Long Term Debt Dates

     

    Issue Price

    100.00000000

    Issue Date

    20020101

    Dated Date

    20020101

    First Coupon Date

    20020701

    Last Coupon Date

    20070101

    Maturity Date

    20070101

    Maturity Price

    100.00

    Eagle Accounting has two different ways to handle the amortization rule change. If you specify a:

    • Retrospective amortization rule change, Eagle Accounting recalculates the amortization stream to where it should be, life-to-date, based on the new amortization method. As you can see in the following figure, the retrospective amortization creates a "blip" in the amortization stream as Eagle Accounting "trues up" the position to be where it should be, based on the Constant Yield 1 amortization method.

    • Prospective amortization rule change, Eagle Accounting recalculates the amortization yield of the security, as if it was purchased on the day that the amortization rule changed. Eagle Accounting uses the amortized cost of the day before the amortization rule change.

    As you can see in the following figure, a Prospective amortization rule change allows for a smoother stream of amortization, because there is no recalculation of amortization from settlement date. If you enact a Retrospective amortization rule change, Eagle Accounting calculates where the security amortization, life-to-date, should be as of the rule change date, and makes the correcting entry to bring the position back to the yield curve of the bond.

    Regardless of when you select an amortization method, Eagle Accounting calculates amortization out to the redemption date and redemption price.

    Image Removed
    Prospective/Retrospective Amort Rule Change Graph

    Image Added

    Amortization for Converted OID Positions

    If you convert an Original Issue Discount (OID) position that has an Open Unit Price that differs from the Original Price, be aware that Eagle Accounting posts negative amortization.

    This occurs because Eagle Accounting takes a prospective approach to amortization when converting lots, and so calculates an Adjusted Issue Price as of the Conversion Settlement Date. For example, suppose an adjusted issue price is 98.43291009, and the open unit price on the conversion transaction is 98.77108358. In this scenario, the position is an acquisition premium wherein Eagle Accounting amortizes from 98.77108358 to 98.43291009 for the Acquisition premium and then Eagle Accounting amortizes OID from 98.43291009 to the Maturity price of 100.

    If you want Eagle Accounting to look retrospectively, you can investigate processing retrospective amortization. Retrospective amortization creates an adjusted issue price as of the Conversion Settlement Date and then trues up the position according to where it should be based upon the actual cash flows that transpire.