An example of a mandatory corporate action for a PIK bond that pays in bond follows. That is, you do not specify a cash rate but you specify a baby bond rate.
Add Mandatory PIK Bond Announcement paying in Bond:
- Account PIKDEMO owns 1,000,000.00 of ITSA Limited.
- On 20031220, ITSA Limited pays in kind, based on a 12% Coupon Rate.
Figure 62: Payment in Kind Bond Panel – Pay in Bond
On 20031215, Eagle Accounting creates a new lot for the Baby Bond. The new lot has a Trade Date equal to the Ex-Date of the corporate action, and a Settlement Date of the lot is the Payment Date of the corporate action. In this scenario, the Trade Date is 20031215, and the Settlement Date is 20031220. See the previous figure.
Eagle Accounting creates the new lot par by using the formula:
Baby Bond Par = (Baby Bond Rate / Coupon Rate) * Total Coupon Due as of Coupon Date
The cost of the bond is calculated by the following formula:
Baby Bond Cost = Baby Bond Par * Baby Bond Price
If there is a difference between the Cost of the Baby Bond and the Coupon Amount, the difference is treated as an entry to Income. Also, when the corporate action is run on 20031215, Eagle Accounting creates the accruals for the rest of the period, and posts those accruals as effective on the Ex-Date of the corporate action.
In this scenario, Eagle Accounting creates the following General Ledger entries.
General Ledger Entries for Mandatory PIK Bond Paid in Cash | ||||||
|---|---|---|---|---|---|---|
Trade Date | Accounting Date | Ledger Account | Ledger Account Description | dr amt | cr amt | Net dr cr amt |
Dec 15 2003 | Dec 15 2003 | 1007000500 | Investments Interest Receivable | 0.00 | 60,000.00 | (60,000.00) |
Dec 15 2003 | Dec 15 2003 | 1010000100 | Cost Of Investments | 59,400.00 | 0.00 | 59,400.00 |
Dec 15 2003 | Dec 15 2003 | 4001000100 | Investment Interest Income | 600.00 | 0.00 | 600.00 |
Dec 15 2003 | Dec 15 2003 | 1007000500 | Investments Interest Receivable | 1,666.67 | 0.00 | 1,666.67 |
Dec 15 2003 | Dec 15 2003 | 4001000100 | Investment Interest Income | 0.00 | 1,666.67 | (1,666.67) |
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