Example 1 – Remaining Deferred Exceeds Paydown Proceeds
As principal payments occur, the entire principal payment is applied to income when the amount of deferred market discount on the tax lot is greater than or equal to the amount of the principal payment (Example 1).
Units | Current Original Cost | Def Market Discount | Cash Proceeds (at par) |
85,000 | 75,000 | 1,000 | 500 |
Proceeds are less than remaining deferred amortization (i.e. 1,000) so the entire proceeds will be recorded as amortization income and book cost will remain unchanged.
The remaining deferred amortization will be reduced by the recorded amortization.
Units – Post | Current Original Cost – Post | Def Market Discount - Post |
84,500 | 75,000 | 500 |
Ledger Postings
| Credit | |
Investment Receivable | 500 |
|
Amortization Income |
| 500 |
Example 2 – Paydown Proceeds Exceeds Remaining Deferred
When the principal payment is greater than the remaining amount of deferred market discount, record the remaining amount as a reduction of current original cost (Example 2).
Units | Current Original Cost | Def Market Discount | Cash Proceeds (at par) |
85,000 | 75,000 | 1,000 | 1,500 |
Proceeds are greater than remaining deferred amortization so the entire deferred amount will be recorded as amortization income and book cost will be reduced by the remainder. The remaining deferred amortization will be reduced by the recorded amortization and will end at 0.
Units – Post | Current Original Cost – Post | Def Market Discount - Post |
83,500 | 74,500 | 0 |
Ledger Postings
| Credit | |
Investment Receivable | 1,500 |
|
Amortization Income |
| 1000 |
Cost |
| 500 |
Example 3 – Paydown Proceeds Exceeds Remaining Deferred and Cost
If the principal payment is greater than the remaining cost and deferred market discount, record the remaining amount as a capital gain (Example 3).
Units | Current Original Cost | Def Market Discount | Cash Proceeds (at par) |
15,000 | 5,000 | 500 | 10,000 |
Proceeds are greater than remaining deferred amortization and the remaining book cost so the entire deferred amount will be recorded as amortization income and book cost will be reduced to zero and the remainder will be recorded as a capital gain.
Units – Post | Current Original Cost – Post | Def Market Discount - Post |
5,000 | 0 | 0 |
Ledger Postings
| Debit | Credit |
Investment Receivable | 10,000 |
|
Amortization Income |
| 500 |
Cost |
| 5,000 |
Cap Gain |
| 4,500 |
Recognition of Paydown Loss/Recovery
For ABS paydowns that have proceeds and principal loss factors in the same coupon cycle the principal loss factors are applied first, followed by the paydown cash received. Apply loss factor quantity as a straight par reduction to the extent that there is sufficient unamortized discount to absorb the quantity without reducing any deferred market discount or original cost.
Unamortized discount = Par – Original Cost – Deferred Amortization
If the loss quantity is greater than the unamortized discount then apply the remaining quantity to the accumulated deferred market discount. This amount is stored on the open lot (Prior Deferred Amort Reduction Local/Base).
If the loss quantity is greater than the total unamortized discount and accumulated deferred market discount the lot will be at par before applying the remaining par quantity. Apply the remaining quantity to cost and Short Term Loss. This amount is stored on the open lot (Prior Cost Reduction Local/Base).
Once the principal loss factor has been applied and reduced the appropriate quantity (and deferred market discount and cost when applicable), the cash portion of the paydown should be applied to the position in the manner described in the prior section.
Unamortized Market Discount (Mkt Dis) is not a stored value in Eagle but is displayed as a balance in the example below for illustrative purposes.
Example 4 - Loss factor is less than the amount of unamortized discount (excluding deferred amortization)
Apply full unit reduction as a decrease in quantity and do not impact the remaining amount of deferred market discount.
No ledger entries are required for the principal loss component as there is no impact on cost.
Pre Paydown Totals
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