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By using the methodology of accruing daily income with the next day's ILB index ratio, the security in this scenario would accrue the inflation income shown in the following table.
Traded Date ILB Index Ratio | ILB Index Ratio used in Earnings | ILB Income | Accrual Delta | PTD Accrual | Total Receivable | |
|---|---|---|---|---|---|---|
Jan 2 2007 | 1.15941 | 1.15936 | -5,000.00 | 10,945.20 | 10,945.20 | 1,896,561.74 |
Jan 3 2007 | 1.15936 | 1.15930 | -6,000.00 | 10,927.80 | 21,873.00 | 1,907,489.54 |
Jan 4 2007 | 1.15930 | 1.15925 | -5,000.00 | 10,943.20 | 32,816.20 | 1,918,432.74 |
Jan 5 2007 | 1.15925 | 1.15919 | -6,000.00 | 10,925.62 | 43,741.82 | 1,929,358.36 |
Jan 6 2007 | 1.15919 | 1.15914 | -5,000.00 | 10,941.21 | 54,683.03 | 1,940,299.57 |
Jan 7 2007 | 1.15914 | 1.15908 | -6,000.00 | 10,923.42 | 65,606.45 | 1,951,222.99 |
Jan 8 2007 | 1.15908 | 1.15902 | -6,000.00 | 10,922.28 | 76,528.73 | 1,962,145.27 |
Jan 9 2007 | 1.15902 | 1.15897 | -5,000.00 | 10,938.17 | 87,466.90 | 1,973,083.44 |
Jan 10 2007 | 1.15897 | 1.15891 | -6,000.00 | 10,920.09 | 98,386.99 | 1,984,003.53 |
The alternative method of this is to use the Trade ILB Index Ratio, which would cause zero inflation linked income that is recognized on day 1. This would result in an ILB income accrual delta and true up on settlement date of the close transaction. This methodology fails for two reasons. First, it reflects zero inflation linked income on settlement date of the open transaction. Secondly, it requires income accruals on settlement date of a close transaction. This does not to adhere to industry standards of accruing income through settlement date minus one.
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