Voluntary PIK Bond Example

You first add a Voluntary PIK Bond Announcement:

• Account PIKDEMO owns 1,000,000.00 of ITSA Limited.

• On 20031220, ITSA Limited pays in kind, based on a 12% Coupon Rate. The entity PIKDEMO wishes to provide its own price for the Baby Bond created by this corporate action. For this to happen, the PIK corporate action must have the Mandatory/Voluntary Flag set to Voluntary. See the following figure.

On 20031220, ITSA Limited pays in kind, based on a 12% Coupon Rate. The entity PIKDEMO wishes to provide its own price for the Baby Bond created by this corporate action. For this to happen, the PIK corporate action must have the Mandatory/Voluntary Flag set to Voluntary. See the following figure.

You then add a Voluntary Entity Election. See the following figure.

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.

• 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.

Eagle Accounting creates the new lot Par using the formula:
Baby Bond Par = (Baby Bond Rate / Coupon Rate) * Total Coupon Due as of Coupon Date or, 60,000.00 = (12/12) * 60,000.00

The Cost of the Bond is calculated by the following formula:
Baby Bond Cost = Baby Bond Par * Baby Bond Price
or, 58,800 = 60,000.00 * 98

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 accruals for the rest of the period, and posts those accruals as effective on the Ex-Date of the corporate action.

General Ledger Entries

In this scenario, Eagle Accounting creates the general ledger entries shown in the following table.