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Inflation Linked Bonds (ILBs), also known as TIPS, real return bonds, treasury gilts, treasury stocks, and generic inflation indexed bonds and linkers, are debt instruments whose principal and subsequent interest payments are adjusted based on the rise of inflation.ILBs  ILBs follow a trailing three month index. They are adjusted based on changes in the CPI-U (consumer price index for all urban consumers) with a three month lag. The actual index used in all calculations is published three months prior, and is referred to as the CPI (consumer price index). For more information, see Understand Inflation Linked Bonds.

To set up an ILB security, you must first add the CPI index security. That is, the underlying index security used to measure the inflation component of the security. For more information, see Add the CPI Index Record.

After adding the underlying index, add the security master record for the ILB using . In Issue Viewer, you use the Add Long Term Debt panel. The underlying index is stored with the Underlying Information group of fields on the Add Long Term Debt panel. Every ILB security has a Dated Date CPI. This is the initial value against which all future index calculations are made and it remains constant throughout the life of the security. The system supports different inflationary income calculation methods of ILBs. The ILB Calculation Type identifies which calculation method to use when calculating the Daily CPI and Daily ILB index ratio.

You must add the monthly CPI index rates in the Variable Rate table to correctly calculate ILB index ratios as of the settlement date of each transaction. The system requires enough future data to calculate the daily ILB index ratio for each day's earnings. In the case of as of transactions, the system automatically runs earnings up to the post date of the trade. Therefore, you must have CPI index rates in the Variable Rate table to prevent the failure of earnings. For more information, see Add Monthly CPI Index

Securities
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To set up an ILB security master file record, you must first add the underlying index security used to measure the inflation component of the security.

To add the underlying index:

  • In Accounting Center, in the left navigation pane, click Setup> Securities > Manage Securities > Issue Viewer.
    You see the Issue Viewer tool.
  • Click the Add arrow, and then click Index.
    You see the Index panel.
  • Complete the options on the Index panel. See the Manage Indices page for more information.
    The following fields are required: Index Name, Index Description, Ticker, Primary Asset ID Type, Primary Asset ID, Processing Security Type, and Asset Currency.


    • Add ILB Securities

    After adding the underlying index, add the ILB security using the Add Long Term Debt panel. The underlying index security information is stored with the Underlying Information group of fields on the Add Long Term Debt panel.

    To add the ILB security:

    1. In Accounting Center, in the left navigation pane, click 

    Setup

    1. Setup > Securities > Manage Securities > Issue Viewer.
      You see the Issue Viewer tool.

    2. Click the Add arrow.

    3. Point to Fixed Income and click Long Term Debt.
      You see the Long Term Debt panel.

    4. Complete the options on the Long Term Debt panel.
      The system uses the value in the Processing Security Type field on the Long Term Debt panel to identify the type of long term debt instrument you are adding. To add an ILB security, select DBFLTP (Inflation Linked Debt Security). Additionally, select Fixed from the Coupon Type Code drop down list. The coupon rate does not change through the life of an ILB security.
      When you select DBFLTP, the system displays additional fields that allow you to enter the underlying index information. Add the underlying index security information in the Underlying Security ID, Underlying Issue Name, Underlying Type, Dated Date CPI, ILB Index Precision, ILB Deflation Protected Maturity, and ILB Calculation Type fields. Eagle supports different inflationary income calculation methods for ILBs, as specified in the ILB Calculation Type field. The dynamic lookup for this field returns all values in the ILB CALC TYPE code category.

    See the ILB Calculation Type Code Values section for more information.

    1.  

    2. Click Submit.

    Add Monthly CPI Index Rates

    The monthly index values that are used to measure inflation are stored as variable rate records for the index security in the Variable Rates table, not for the ILB security. The values are three-month trailing values for the CPI index. That is, the processing of an ILB security for the month of May uses the CPI-U data available in February. The system calculates the daily CPI index rates based on the monthly values stored in the Variable Rate table. In the system, only the CPI rate for the first day of each month is needed to perform this calculation. You should not enter the intermediate daily CPI rates because doing so can cause incorrect calculations. Use the List Variable Rates panel to view the CPI rates entered in the table. See the Manage Variable Rates page for more information. The calculated daily CPI rates are also available for review in the income table and cost object. Note the source for the CPI-U rates should match the source on the entity record for the security that holds the ILB bond. If the sources do not match, the system cannot calculate the ILB index ratio.

    To add the monthly CPI index rates:

    1. In Accounting Center, in the left navigation pane, click Setup> Securities > Manage Securities > Issue Viewer.
      You see the Issue Viewer tool.
    2. Open Issue Variable Rates, and then click Add Variable Rate.
      You see the Add Variable Rate panel.
    3. In the Source Name field, enter the variable rate source of the entity.
    4. In the Asset ID Type field, enter the primary asset identifier type for the security, such as CUSIP, ISIN, and SEDOL.
    5. In the Asset ID field, enter the identifier of the CPI index security.
    6. In the Issue Name field, enter the name of the CPI index security.
    7. In the Effective Date field, enter the CPI index date.
      This value should be the day of the month that corresponds to the rate. For example, if you were updating the rate for the CPI-U for May, the effective date would be 5/1.
    8. In the Variable Rate field, enter the rate of the monthly CPI index.
    9. In the Schedule Period Types field, optionally specify the index reset frequency for reporting purposes.
    10. Click Submit.

    Long Term Debt Panel - ILB Options

    The following are the key options for an ILB security. See the Long Term Debt Panel Options page for more information about the Long Term Debt panel. Note options may vary according to your selections. 

    Option

    Tag

    Description

    Long Term Debt Details

    Investment Type

    11

    Displays the investment type, such as FI (fixed income).

    Processing Security Type

    3931

    Specifies the code value that the system uses to identify the type of long term debt instrument you are adding. An inflation linked bond must be set up with a processing security type of DBFLTP (Inflation Linked Debt Instrument). The system requires that you populate the underlying index with the index that the security marks to market for inflation, and also requires a dated date CPI (consumer price index) as part of the security master record setup.

    Long Term Debt Coupon Periods

    Coupon

    70

    Specifies the rate at which the security accrues interest. It is expressed as an accrual rate. A value of zero is required for zero coupon bonds.

    Coupon Type Code

    97

    Indicates the type of coupon associated with the security. Options include:

    • Variable Rate. The security has fixed coupon dates and uses a variable rate based on the security identifier to calculate the coupon for use in earnings. You must enter the rate in the Variable Rate table.

    • Step Rate. The security has fixed coupon dates and uses a variable rate based on the security identifier to calculate the coupon for use in earnings. You must enter the rate in the Variable Rate table. The system recognizes this option as a step bond (also called a step coupon bond, step up bond, or step down bond).

    • Fixed Rate. The security has fixed coupon dates and has a fixed coupon rate to calculate the coupon for use in earnings.

    • Unscheduled Variable Rate. The security has unscheduled payments and accrues interest based on a rate you enter in the Variable Rate table.

    Underlying Information

    Underlying Security ID

    1348

    Specifies the underlying index that an inflation bond security measures inflationary adjustments against.

    Underlying Issue Name

    1141

    Specifies the name of the underlying index that an inflation bond security measures inflationary adjustments against.

    Underlying Ticker

    1349

    Specifies the ticker of the underlying index.

    Underlying Type

    916

    Specifies the type of underlying index. Options include:

    • Cheapest to Deliver

    • Fixed Leg

    • Float Leg

    • Index

    • Loan

    • Pay Fixed

    • Pay Float

    • Primary

    • Received Fixed

    Dated Date CPI

    1550

    Specifies the value of the index that is used to measure inflation of an inflation bond security, as of the dated date of the security. It is used as a base line to measure inflation adjustment to the bond.

    ILB Calculation Type

    11808

    Identifies

    the

    which calculation method to use when calculating the

    daily

    Daily CPI and the

    daily

    Daily ILB

    index ratio

    Index Ratio. The dynamic lookup for this field returns all values in the ILB CALC TYPE code category.

    See the ILB Calculation Type Code Values section for a list of valid options for the ILB Calculation Type field

    Eagle Accounting provides a complete list of code value ILB calculation types as part of the install/upgrade process. Options include:

    • 30E_3M. Sweden

    • 30_1M. Iceland

    • ACT_3J. Japanese

    • ACT_3M. USCanadian

    • ACT_4M. South Africa

    • AVG_6M. New Zealand (Average CPI Values)

    • AVG_GT1_6M. Australian (Ave change)

    • IDX_6M. New Zealand (Actual CPI Values)

    • IDX_GT1_6M. Australian (Actual CPI Values)

    • NONE_8M. UK Index-Linked Gilts

    • RATIOS. User Provided. Used if Eagle's accounting solution does not provide an appropriate method to calculate the Daily Reference CPI and the Daily Index Ratio. If you select this option, you must directly input the index ratio for every day accruals are processed on the underlying index. For example, the ILB is issued by a country for which no ILB calculation type is available.

    • RATIOS_SD. User-Provided (same-day earnings ratio). Used if Eagle's accounting solution does not provide an appropriate method to calculate the Daily Reference CPI and the Daily Index Ratio and you need to provide the current day's index ratio for earnings rather than the next day's index ratio. If you select this option, you must directly input the index ratio for every day accruals are processed on the underlying index. For example, used for Australian ILBs affected by the Australian Bureau of statistics re-basing date of October 24, 2012.

    ILB Index Precision

    11017

    Determines the decimal precision calculation of the ILB index ratio. The system supports a calculation of 12 places to the right of the decimal.

    ILB Deflation Protected Maturity

    11809

    Determines if the security has the initial principal investment protected at the time of maturity. Options include:

    • Yes. The system safeguards against deflation by guaranteeing that the principal payment at maturity is never less than the initial principal at issuance of the security. That is, par value.

    • No. The system does not safeguard against deflation at the time of the maturity transaction. This means that the system creates a maturity transaction using the value of the ILB index ratio at the time of maturity, even if the ILB index ratio is less than 1.

    ILB Min Index Ratio

    3854

    Specifies the guaranteed minimum ILB index ratio at maturity.

    ILB Calculation Type Code Values

    The following table displays the valid options for the ILB Calculation Type field.             

    Code Value

    Code Name

    30E_3M

    Sweden

    30_1M

    Iceland

    ACT_3J

    Japan

    ACT_3M

    United States and Canada

    ACT_4M

    South Africa

    AVG_6M

    New Zealand (average CPI values)

    AVG_GT1_6M

    Australia (average change)

    IDX_6M

    New Zealand (actual CPI values)

    IDX_GT1_6M

    Australia (actual CPI values)

    NONE_8M

    United Kingdom Index-Linked Gilts

    RATIOS

    User Provided

    RATIOS_SD

    User-Provided (same-day earnings ratio)