The Embedded Equity Option Value (EEOV) methodology is also used for tax lots purchased at a premium. This method allows the convertible bond price to be separated from the convertible bond cost for the purposes of calculating the amortization yield. After separation of the embedded equity option value, if the resulting fixed income cost is at a discount, then discount should not be amortized if the combined amortized cost and the embedded option premium will exceed the bond's cash redemption value (that is, par in most cases). The system considers put and call dates and put and call prices along with maturity date and price in the calculation of yield according to the amortization rule elections.
The following two figures show the Convertible Bond Flow chart, which shows the process by which the system calculates amortization for a convertible bond with the Embedded Equity Option Value method.
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