In the Amortization/Accretion Rules panel, when you add amortization/accretion rules that specify how the system amortizes the securities held by the entity, you can select various options based on the requirements of your business. See the Add Amortization/Accretion Rules section for details on adding amortization/accretion rules.
The following are the options in the Amortization/Accretion Rules panel:
■ Rule Name (tag 3197). Specifies the name of the amortization/accretion accounting rule. You use the Add Accounting Rules panel to add the rule name and select a rule type of amortization/accretion rule. The system provides the following accounting rules for amortization/accretion:
– DefaultEY. Constant yield amortization.
– DefaultEYAmortAtDisp. Effective yield amortization with amortization at disposition.
– DefaultSL. Straight line amortization.
– DefaultSLAmortAtDisp. Straight line amortization with amortization at disposition.
– DefaultSLA. Straight line actual amortization.
– DefaultSLAAmortAtDisp. Straight line actual amortization with amortization at disposition.
– DefaultNone. No amortization.
– DefaultNoneAmortatDisp. No amortization with amortization at disposition.
■ Amortization/Accretion Security Type (tag 3931). Identifies the processing security types to which the amortization/accretion rule applies. The rule you add applies to securities with that processing security type, provided you do not set up a rule for an asset identifier that also has that processing security type. If you leave this field blank, along with Amortization/Accretion Rule Type, Issue Name, and Asset ID fields, the rule is applied at the accounting basis level.
■ Amortization/Accretion Rule Type (tag 12008). Defines the amortization rule at a level that falls above the asset identifier level and below the processing security type level. Use this option when amortization rules vary within securities with a common processing security type and you do not want to assign those rules at the individual security level. Before you assign rule types, use the Add Code Value panel to create the code values, such as Muni, Step, or Zero, with a code category name of AMORTRULETYPE.
■ Issue Name (tag 961). If you define the rule at the security level, specifies the name of the security. Otherwise, if you leave this field blank, the system applies the rule to all securities within the entity.
■ Cross Reference Type (tag 1432). If you define the rule at the security level, specifies the cross reference or primary asset identifier type for the security, such as CUSIP, ISIN, and SEDOL. Otherwise, you can leave this field blank.
■ Cross Reference ID (tag 14). If you define the rule at the security level, specifies the identification number of the cross reference or primary asset ID for the security. Otherwise, you can leave this field blank.
■ Rule Begin Date (tag 220). Specifies the beginning date for the amortization rule. If the rule should no longer be applied after a certain date, you enter the End Date (tag 221) on the Change Amortization/Accretion Rules panel, and then create a new amortization rule in the Add Amortization/Accretion Rules panel with a Rule Begin Date equal to the previous Rule End Date, plus one day.
■ Amortization/Accretion Election (tag 3933). Determines how to recognize amortization on bonds. Options include Market Discount, Market Premium, Both, and None. If you select a value of Both or None, the amortization rule applies to both market discount and market premium tax lots. The system prevents you from setting up a separate amortization rule for either market premium or market discount.
■ Taxable Status Indicator (tag 1143). Specifies the tax status of the securities to which the amortization/accretion rule applies. The system uses the Federal Tax Indicator field (tag 1545) at the security level to determine the security's tax status. Options include:
– Taxable
– Non-Taxable
– Both (Default)
■ Amortization/Accretion Method (tag 113). Specifies the amortization/accretion method. Options include:
– Constant Yield 1. Calculates where the amortization should be each day, life-to-date, based on the constant yield amortization calculation and the security's day count.
– Constant Yield 2. Calculates the period-to-date amortization using the constant yield amortization formula and divides the calculated period-to-date amortization by the actual number of days in the coupon period.
– Level Yield 1. Calculates where the amortization should be each day, life-to-date, based on the level yield amortization calculation and the day count of the security.
– Level Yield 2. Calculates where the amortization will be at the end of the period and then divides the total amount of amortization by the actual number of days left in the periods.
– Level Yield Daily Compounding 1. Calculates amortization using the level yield 1 calculation, but compounds the amortization daily, rather than on the coupon date of the security.
– Level Yield Daily Compounding 2. Calculates amortization using the level yield 2 amortization calculation within coupon periods that have daily compounding.
– Straight Line. Calculates amortization by adjusting the cost of the holding toward par by equal daily amounts, throughout the life of the bond. The daily amortization/accretion delta for straight line amortization is calculated by subtracting the original cost from par, then dividing the result by the number of days in the life of the issue, from settlement date. Straight-line amortization is used mainly for short-term debt securities, but you can use it for any security type if appropriate. The system supports two different methods of calculating straight-line amortization: Straight Line Actual and Straight Line.
– Straight Line Actual. Calculates amortization using the daily factor amount, which is calculated by subtracting the original cost from par, then dividing the result by the actual number of days in the life of the issue from settlement date. This amortization method uses an actual day count to determine the amortization daily delta (the daily change in the amortized amount). For example, a bond with a 30/360 Day Count basis using this amortization method would have an amortization daily factor applied on the 31st day of the month.
– None. Does not calculate amortization/accretion.
■ Prospective Amortization Yield Recalculation Frequency (tag 16013). (For Future Use.) This field appears if you set the Amortization/Accretion Method field to a value of Default or Prospective. Options include:
– DEF (Reference data effecting amortization yield). Default.
– DEFCF (Changes for amort yield and third party cash flow).
■ Amortization Cap/Floor Method (tag 10130). Determines amortization on caps/floors. This option does not apply to Average Cost. Options include:
– No Restriction. Amortization can move in any direction and can amortize away from the redemption price. For example, things that could cause amortization to move away from par include scalloping, long or short coupon periods caused by business day convention overrides, and put or call information.
– Book Price Cannot Move Away From Par. In the event that amortization is moving away from par (due to a mathematical anomaly or call or put data), the system does not apply amortization during that period and recalculates a new yield at the start of the next coupon period. Calculation of the new yield is based upon the amortized cost as of that date and the applicable amortization rule.
■ Amortization at Disposition (tag 3902). Specifies whether the system amortizes at disposition. Options include:
– Yes. Amortize at disposition. Post market premium amortization, OID amortization, and acquisition premium to the general ledger and subledger on a daily basis.
– No. Do not amortize at disposition. Post amortization/accretion to the subledger and general ledger on a daily basis based on the amortization rule.
■ Recognize OID (tag 9197). Specifies whether you want to recognize OID (original issue discount) amortization on bonds issued at a discount price. The system determines OID eligibility by checking the OID Indicator field (tag 218) on the security master file. Options include:
– Yes. If the OID Indicator field on the SMF is set to Yes and the Issue price of the bond is less than the maturity price, the system calculates the adjusted issue price for the settlement date of the bond based on the constant yield 2 method of amortization. The system then recognizes two different streams of amortization: an OID stream of amortization from the adjusted issue price to redemption date and redemption price, and an acquisition premium/discount stream from the purchase price of the bond to the adjusted issue price.
– No. If you set this field to No and the OID Indicator field on the SMF is set to Yes, the system recognizes market discount amortization if the security is purchased at a discount and the entity/accounting basis recognizes market discount amortization.
– Constant Yield Differential. If the OID Indicator field on the SMF is set to Yes and the Issue price of the bond is less than the maturity price, the system calculates the adjusted issue price for the settlement date of the bond based on the constant yield 2 method of amortization. The OID income is calculated in the same way it is when you select a value of Yes for this field. To calculate the amortization income, the system starts with the amortization stream from purchase price to maturity date and price. The OID stream value is then subtracted from the amortization stream value to compute the amortization income posting. If the purchase price is greater than the adjusted issue price at purchase (acquisition premium), the amortization income is negative.
■ Market Discount Amortization Method - OID Bonds (tag 2301). Indicates whether to use different amortization methods for original issue discount (OID) and market amortization. This field appears if you set the Recognize OID field to Yes. Options include:
– Use Main Amort Rule Method. Default. Indicates that you do not want amortization methods used for OID and market amortization to differ.
– Straight Line. Indicates that you want market amortization to use the straight line method and OID amortization to use your default amortization method. Select this option only if your default amortization method is not straight line. For example, if your default amortization method is constant yield, you can select this option to maintain separate amortization streams for OID and market discount amortization, using the straight line method for market discount and constant yield for the original issue discount stream.
■ Premium Proportional (tag 4526). Specifies whether you want to net the OID (original issue discount) amortization and the acquisition premium on the general ledger. Options include:
– Yes. For OID eligible bonds purchased at a discount, but still above the adjusted issue price, the system nets the values of the acquisition premium stream and OID amortization steam on the general ledger, and tracks the acquisition premium and OID amortization separately on the subledger. The system calculates the acquisition amortization premium stream daily delta in proportion to the amount of the OID being recognized.
– No. The system tracks the acquisition premium and OID amortization stream separately on the general ledger and subledger.
■ Min ILB Ratio Flag (tag 3855). Determines whether the guaranteed minimum in deflation protected ILB (inflation linked bond) securities is used in determining daily ILB income. This is specific to the derivation of daily ILB income. The current ILB index ratio is used in accrual and amortization processing. Options include Yes and No (Default).
■ DeMinimis Test Application (tag 3935). Determines the amortization streams to which the system should apply the DeMinimis test, and what action should take place if a security fails the DeMinimis test. The DeMinimis test determines whether the amount to amortize is greater than ¼ of 1% (.0025) of the redemption price, multiplied by the number of complete years to redemption date. Options include:
– OID Only. The system only applies the DeMinimis test to the OID amortization stream.
– All Discount Purchases. The system applies the DeMinimis test to the entire total discount amortization stream. If you select this option, DeMinimis does not apply to securities bought at a market premium.
– Acquisition/Market Discount. The system applies the DeMinimis test to the market discount stream or for an acquisition discount amortization stream (an acquisition discount amortization indicates that an OID eligible bond is purchased below the adjusted issue price.
– Apply Each Independently. The system applies the DeMinimis test to the market discount stream and OID stream independently. If it determines the market discount stream to be deminimis, it discontinues the market discount stream. If it determines the OID stream to be deminimis, it discontinues the OID stream.
– None. The system does not apply the DeMinimis test.
■ Within DeMinimis Test Action (tag 3936). Identifies what action takes place if the amortization stream specified in the DeMinimis Test Application field (tag 3935) fails the DeMinimis test. Options include:
– Discontinue Amortization Streams. If you set DeMinimis Test Application to All Discount Purchases, the Within DeMinimis Test Action field displays a value of Discontinue Amortization Streams, and you cannot change it. If you set DeMinimis Test Application to OID Only, you can set the Within DeMinimis Test Action field to a value of Discontinue Amortization Streams.
– Apply OID Only. If you set DeMinimis Test Application to Acquisition Discount/Market Discount, the Within DeMinimis Test Action field displays a value of Apply OID Only, and you cannot change it.
– Discontinue Amortization Streams. If you set DeMinimis Test Application to Apply Each Independently, the Within DeMinimis Test Action field displays a value of Discontinue Amortization Streams, and you cannot change it.
– Apply Market Discount. If you set DeMinimis Test Application to OID Only, you can set the Within DeMinimis Test Action field to a value of Apply Market Discount.
■ Straight Line Override (tag 3938). Allows the system to discontinue the specified amortization/accretion method prospectively, and to apply the straight line actual (SLA) amortization method within 60, 180, or 365 days from maturity. You can select a value of 60, 180, or 365 days. The default value of this field is 0 (zero) days. This field is available only when you set Amortization/Accretion Method to a value of constant yield 1 (CY1), constant yield 2 (CY2), level yield (LY1), or level yield 2 (LY2).
■ Recognize Call Date & Prices (tag 3939). Specifies whether the system factors the call dates and prices into the amortization calculation. The system uses the calls, puts, sink, and pre-refunded information in the Schedule table for yield calculation, but processes calls, puts, sink payments, and transactions based on information in the Corporate Action table. Options include:
– Yield to Worst Call Date. Calculate the yield and amortization target date to the call date and price that gives the lowest yield for the tax lot. If the security is not called at the worst call date, calculate to the next worst call date. If no call date is available after the worst call date, amortize to maturity date. When calculating a yield to worst, the system includes the yield to maturity date and price in the calculation, so in some cases, the yield to worst could be the maturity date and price.
– Yield to Next Call Date. Calculate the yield and amortization target date to the next available call date and price in the schedule. If the security is not called at the next call date, calculate to the next call date in the schedule. If no call date is available after the last call date in the schedule, the system amortizes to maturity date.
– Yield to Next Call Date with Suspense. Amortize to the next call date and price while suspending any amortization of premium or accretion of discount if the next call date and price would cause the tax lot to amortize away from par.
– Do Not Recognize Call Feature. Ignore the call schedule located in the schedule table for the purpose of calculating an amortization yield and amortization target date.
– Yield to Best Call with Suspense. Select the call/put date and price between the yield date and maturity date that gives the highest yield. The yields to maturity and any pre-refunding are included as if they were calls. Calls and puts after any pre-refunding date are ignored. If this call/put price would cause amortization to move away from the bond's par value, hold amortization constant until this call/put date. When the call or put is not executed, repeat the process to find the highest remaining yield and its call or put date. While this calculation is intended for use with taxable securities purchased at a premium, it operates on any holding that meets the amortization/accretion rule's selection criteria.
■ Recognize Put Date & Prices (tag 3937). Specifies whether the system factors the put dates and prices into the amortization calculation. The system uses the calls, puts, sink, and pre-refunded information in the Schedule table for yield calculation, but processes calls, puts, sink payments, and transactions based on information in the Corporate Action table. Options include:
– Do Not Recognize Put Feature. Ignore the put schedule located in the schedule table for the purpose of calculating an amortization yield and amortization target date.
– Yield to Best Put Date. Calculate the yield and amortization target date to the put date and price that gives the highest yield. If the security is not put at the best put date, calculate to the next best put date. If no put date is available after the best put date, amortize to maturity date. When calculating a yield to best, the system includes the yield to maturity date and price in the calculation, so in some cases, the yield to best could be the maturity date and price.
– Yield to Next Put Date. Calculate the yield and amortization target date to the next put date and price in the schedule. If the security is not put at the next put date, calculate to the next put date in the schedule. If no put date is available after the last put date in the schedule, the system amortizes to maturity date.
– Yield to Next Put Date with Suspense. Amortize to the next put date and price while suspending any amortization of premium or accretion of discount if the next put date and price would cause the tax lot to amortize away from par.
■ Recognize Pre-refunding (tag 3860). Determines whether the pre-refunded date is used during amortization. Options include:
– Recognize Pre-refunded Date. Default. This option supports legacy processing.
– Do Not Recognize Pre-refunded Date.
– Recognize Pre-refunded Date using Announcement Date.
■ Step Bond Utilize Bifurcation Method (tag 3934). Indicates whether you want to recognize the step bond as a regular variable rate bond. Options include:
– Yes. The system recognizes the step bond as a variable rate bond. Future variable rates are ignored when calculating the amortization yield for the step bond.
– No. The system does not recognize the step bond as a variable rate bond. Future variable rates are recognized when calculating the amortization yield for the step bond.
■ Convertible Option -Price Method (tag 3858). Indicates the price methodology to use for convertible securities during amortization. Options include:
– Embedded Equity Option Value. Allows for the separation of the embedded equity option value from convertible bond acquisition cost by deriving the fixed income bond cost and utilizing that for amortization. The calculation for fixed income bond cost is as follows: Fixed Income Bond Cost = Convertible Bond Acquisition Cost - Embedded Equity Option Value. If the fixed income bond cost is at a premium, the system amortizes to the system derived maturity price plus the embedded equity option value.
– Stated Redemption Price at Maturity. Default. Considers the value of the stock in determining the target maturity price. The calculation is as follows: Conversion Ratio * Market Value of Underlying Stock/10.
■ Use Third Party Cash Flows (tag 11768). Determines which external cash flow record to use. If the system does not find a match, it uses the values in the Amortization Method field (tag 113) and Prepayment Assumptions field (tag 4518) to drive the calculation of amortization yields. Options include:
– Yes. Allows you to use externally calculated cash flows in the calculation of an amortization yield. The system discounts the cash flows in the Vendor Cash Flow table and applies amortization based on the amortization method established for the particular amortization rule. For example, if the amortization/accretion rule is established as constant yield 2, the system discounts the cash flows and applies amortization based on a constant yield 2 methodology. If you select this value, the Third Party Cash Flows Source Name field, the Cash Flow Type field, and the Requested Speed field appear, and are required.
– No. Does not use externally calculated cash flows in the calculation of an amortization yield.
– Automatic Adjustments. Allows you to use externally calculated cash flows in the calculation of an amortization yield, and adjust future paydown cash flows when payments received differ from projected payments. If you select this value, the Third Party Cash Flows Source Name field, the Cash Flow Type field, and the Requested Speed field appear, and are required.
■ Third Party Cash Flows Source Name (tag 1102). Specifies the source name for the cash flow. The system uses the Third Party Cash Flows Source Name field (tag 1102), the Cash Flow Type field (tag 11760), and the Requested Speed field (tag 11761) in conjunction with the Security Alias to determine which external cash flow record to use on the Vendor Cash Flow table. If the system does not find a match based on these fields, the system uses the values in the Amortization Method field (tag 113) and Prepayment Assumptions field (tag 4518) to drive the calculation of amortization yields.
■ Cash Flow Type (tag 11760). Specifies the prepayment model used to create the cash flow. The system uses the Third Party Cash Flows Source Name field (tag 1102), the Cash Flow Type field (tag 11760), and the Requested Speed field (tag 11761) in conjunction with the Security Alias to determine which external cash flow record to use on the Vendor Cash Flow table. If the system does not find a match based on these fields, the system uses the values in the Amortization Method field (tag 113) and Prepayment Assumptions field (tag 4518) to drive the calculation of amortization yields.
■ Requested Speed (tag 11761). Specifies the speed type used to calculate the principal and interest cash flows. The system uses the Third Party Cash Flows Source Name field (tag 1102), the Cash Flow Type field (tag 11760), and the Requested Speed field (tag 11761) in conjunction with the Security Alias to determine which external cash flow record to use on the Vendor Cash Flow table. If the system does not find a match based on these fields, the system uses the values in the Amortization Method field (tag 113) and Prepayment Assumptions field (tag 4518) to drive the calculation of amortization yields.
■ Use User Defined Amortization Schedule (tag 9156). Determines whether to set up a customized user defined amortization schedule for a particular lot. Options include Yes and No. Note that the default accrual method of Straight Line Amortization (SLA) for all user lot level amortization schedules was removed in V12.0. If you have a schedule requiring straight line amortization (SLA) and the amortization rule is not SLA, you must create a new SLA amortization rule for the lot level schedule.
■ Prepayment Assumption (tag 4518). Determines the prepayment speed and prepayment method the system uses to calculate additional principal repayment in the projection of future cash flows for mortgage backed and asset backed securities.
■ Prepayment Speed Override (tag 9689). Indicates whether you want to override the prepayment model and speed. This field appears if you add a security level amortization rule for a mortgage backed and/or asset backed security. Options include Yes and No (Default).
■ Estimate Vrs. Actual (tag 9690). Allows you to select only a value of Actual, as the FASB-91 report has been rewritten not to use this field. If you set the Prepayment Speed Override field (tag 9689) to Yes, this field appears and is required.
■ Override Prepayment Model (tag 9691). Specifies the prepayment model to apply when calculating additional principal repayment. If you set the Prepayment Speed Override field (tag 9689) to Yes, this field appears and is required. Options include CPR and PSA.
■ Override Prepayment Speed (tag 9692). Specifies the speed you want to use in the FASB-91 report and/or in the earnings calculations. If you set the Prepayment Speed Override field (tag 9689) to Yes, this field appears and is required.
■ Allow Amortization on Short Positions (tag 11484). Determines whether to allow amortization on short positions. Options include Yes and No (Default).
■ Amortization Rule Change Application (tag 9007). Specifies processing for changes to the change application amortization rule's begin and end dates. The system uses this field when you create a new accretion/amortization rule to replace an existing accretion/amortization rule. Options include:
– Prospective. 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 Settlement Date. 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 to the Eagle system, and settlement date forward for lots purchased to the Eagle system.
– Retrospective Amortization from Original Settlement Date. 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 to the Eagle system, and from the settlement date for lots purchased directly to the Eagle system. This option acts exactly like a retrospective amortization calculation when you change the amortization rule based on an effective date.
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