About Amortization/Accretion Methods

Straight Line Amortization

Eagle Accounting supports two different methods of calculating straight-line amortization:

• Straight Line

• Straight Line Actual

Straight Line

Straight Line amortization adjusts 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 straight-line amortization for any security type, when you deem it appropriate.

If you select the Straight Line (SL) amortization method, Eagle Accounting calculates a constant yield type of amortization yield. The amortization yield data is for reporting only when you select Straight Line amortization.

The Straight Line amortization daily factor amount 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, based upon day count of the security.

Because Straight Line amortization uses the Day Count of the security when calculating the amortization daily delta, a bond with a 30/360 Day Count Basis, amortizing Straight Line Actual, does not have an amortization daily factor applied on the 31st day of the month, unless the 31st is included in the day count calculation. If you select Straight Line amortization method, Eagle Accounting calculates a constant yield type of amortization yield. When you select Straight Line amortization, the amortization yield is for reporting only.

If you have a security with a 30/360 Day Count and amortize with the Straight Line amortization method, there is no amortization delta on the 31st day of the month. Also, a security with a 30/360 Day Count and Straight Line amortization method has an amortization delta that is three times more than normal on February 28th. For leap year, February 28 has a normal amortization delta, and February 29 has a double amortization delta.

Straight Line Actual

The Straight Line Actual (SLA) amortization daily factor amount 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.

Because Straight Line Actual amortization uses an actual day count to determine the amortization daily delta (the daily change in the amortized amount), a bond with a 30/360 Day Count Basis, amortizing straight line actual, has an amortization daily factor applied on the 31st day of the month.

Constant Yield Amortization

Constant Yield Amortization takes into account the income that is produced on a debt security. This accretion/amortization type utilizes the discount rate used in computing the present value of all future principal and interest payments made by a debt instrument, and produce an amount equal to the cost of the debt instrument.

The Constant Yield method takes into account the:

• Purchase Price

• Accrued Interest Purchased

• Redemption Value

• Time to Redemption

• Coupon Yield

• Time between interest payments

After the Constant Yield is calculated, it remains constant to Maturity Date, provided there are no changes to the reference information, prepayment assumptions, and amortization rules. If a variable rate, prepayment assumption, amortization rule election, or other reference data changes, Eagle Accounting recalculates the amortization yield. Eagle Accounting currently supports two different methods of Constant Yield Amortization: Constant Yield 1 and Constant Yield 2.

Constant Yield 1 (CY1)

Constant Yield 1 (CY1) calculates where the amortization should be each day, life-to-date, based on the Constant Yield calculation and the security's day count.

If you have a security with a 30/360 Day Count, and amortize with Constant Yield 1, there is no amortization delta on the 31st day of the month. Also, a security with a 30/360 Day Count, and Constant Yield amortization method, has an amortization delta on February 28th that is three times more than normal. For leap year, February 28 has a normal amortization delta, and February 29 has a double amortization

Constant Yield 2 (CY2)

Constant Yield 2 (CY2) (also known as "Constant Yield Smoothing within Coupon Periods") uses the same formula as Constant Yield 1 to calculate amortization. However, Constant Yield 2 differs from Constant Yield 1 by using the constant yield amortization formula to calculate the period-to-date amortization, and then dividing the calculated period-to-date amortization by the actual number of days in the coupon period.

Dividing the total expected-to-date amortization by the actual number of days in the coupon period results in a smoother stream of amortization over the coupon period. Note that because Eagle Accounting uses the actual number of days in the period, a bond with a 30/360 Day Count has an amortization on the 31st of the month.

At the end of the coupon period, both Constant Yield 1 and Constant Yield 2 have the same total amount of amortization.

Level Yield Amortization

The Level Yield method of amortization, also known as the "Constant Interest Rate," has an amortization approach similar to Constant Yield amortization, with the exception that Level Yield amortization does not take into account accrued interest purchased when calculating yield and applying amortization/accretion. The Level Yield method takes into account the income that is produced on a debt security. This accretion/amortization type utilizes the discount rate that, when used to compute the present value of all principal and interest payments to be made under the debt instrument, produces an amount equal to the cost of the debt instrument.

The Level Yield method takes into account the:

• Purchase Price

• Redemption Value

• Time to Redemption

• Coupon Yield

• Time between Interest Payments

After the Level Yield is calculated, it remains constant all the way through to Maturity Date, provided there are no changes to the reference information, prepayment assumptions, and amortization calculation. If a variable rate changes, a prepayment assumption changes, amortization rules election changes, or other reference date changes, Eagle Accounting recalculates the amortization yield.

Eagle Accounting currently supports four different methods of applying Level Yield amortization yields:

• Level Yield 1

• Level Yield 2

• Level Yield Daily Compounding 1

• Level Yield Daily Compounding 2

Level Yield 1 (LY1)

Level Yield 1 (LY1). Calculates where the amortization should be, life-to-date, based on the Level Yield calculation and the day count of the security.

Level Yield 2 (LY2)

Level Yield 2 (LY2). (also known as Level Yield Smoothing within coupon periods) Calculates where the amortization is 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

Level Yield Daily Compounding 1 uses the Level Yield 1 amortization formula, but compounds the amortization daily, rather than on the coupon date of the security. Level Yield Daily 1 compounds daily, based on the day count calculation. For example, a bond with a 30/360 Day Count has the amortization compounded 360 times in a year. Because this is daily compounding, Eagle Accounting calculates the next day of amortization against the previous day's cost.

Level Yield Daily Compounding 2

Level Yield Daily Compounding 2. Is also known as "Level Yield Smoothing within Coupon Periods" that have daily compounding.

User Defined Amortization

User Defined Method. Some clients prefer to perform their own yield calculations or use externally calculated cash flows to calculate amortization yields, and produce their own accretion/amortization schedules. User Defined Amortization is used to accommodate those clients, or for complex security types that cannot be fully automated using the Constant Yield, Level Yield, or Straight Line amortization methods.

Eagle Accounting allows you to set up user defined amortization based on an amortization schedule, or based on a series of amortization target dates and prices, or based on a user defined yield or based on an externally calculated cash flow. For more information, see Manage Amortization Schedule Overrides. If you are setting up a user defined amortization, you can only set up one user defined amortization method per lot per amortization end date.

Also, with regard to a user defined schedule or amortizing to a user defined price or Yield Override, the accounting basis's amortization rule must have the Use User Defined Amortization Schedule (tag 9156) set to Yes in order for Eagle Accounting to recognize the user defined amortization schedules. Eagle Accounting amortizes user defined schedules, amortizes to a price and Yield Override, using the amortization method indicated in the appropriate amortization rule. When applying amortization, Eagle Accounting utilizes the amortization method specified in the amortization rule.

The user defined Yield Override does require you to set Use User Defined Amortization Schedule (tag 9156) in the amortization rule in order to work in Eagle Accounting. For open tax lot converting up to version 2017 that have been utilizing the legacy Yield Override functionality, the Eagle Accounting Earnings process honors the Yield Override Indicator field on the tax lot (tag 8561 set to Yes) when calculating earnings. It is recommended to establish a Yield Override schedule in the User Defined Amortization Schedule and establish an amortization rule with the Use User Defined Amortization Schedule field (tag 9156) set to Yes.

With regard to using third party cash flows, the accounting basis's amortization rule must have the Use Third Party Cash Flows (tag 11768) set to Yes in order for Eagle Accounting to recognize your desire to use externally calculated cash flows for the purposes of calculating amortization yields. Also, the Third Party Cash Flows Source Name (tag 1102), Cash Flow Type (tag 11760), and Requested Speed (tag 11761) on the amortization rule must match the Source Name (tag 1102), Cash Flow Type (tag 11760), and Requested Speed Type (tag 11761) on the Vendor Cash Flow table for Eagle Accounting to utilize the externally calculated cash flows. When applying amortization, Eagle Accounting utilizes the amortization method specified in the amortization rule. Note that if Eagle Accounting does not find a match in the Vendor Cash Flow table for the Third Party Cash Flows Source Name (tag 1102), Cash Flow Type (tag 11760), and Requested Speed (tag 11761) specified in the amortization rule, Eagle Accounting calculates an amortization yield as specified by the values in the applicable amortization rule (Amortization Method (tag 113), and Prepayment Assumption (tag 4518).