Understand the Amortization/Accretion Method

Owned by Nancy Cohn (Deactivated)
Last updated: Oct 21, 2024 by Jawann Swislow
2 min read

In the Amortization & Accretion Rules panels, you can specify a value for the Amortization/Accretion Method (tag 113) field. 

For this field, you select the type of amortization method to apply for an entity default, Processing Security Type, Amortization Accretion Rule Type, or Security ID Level.

Eagle Accounting supports the following Amortization/Accretion Methods:

  • CY1. Constant Yield 1

  • CY2. Constant Yield 2

  • SL. Straight Line

  • SLA. Straight Line Actual

  • LY1. Level Yield

  • LY2. Level Yield 2

  • LD1. Level Yield Daily Compounding 1

  • LD2. Level Yield Daily Compounding 2

  • None. No Amortization

For Average Cost portfolios, Eagle Accounting supports only certain amortization methods. For more information, see Understand Average Cost Amortization.

Scenario

Be aware that regardless of the Amortization Method you select (excluding None), Eagle Accounting amortizes to the target redemption price. For example, if you amortize the following scenario from Settlement Date to Maturity Date, each amortization method reaches 100,000 in total amortization, so there is no gain/loss at time of maturity. The difference between the methods is how they reach 100,000.

Coupon Rate:

10%

Issue Date:

01/01/2002

Dated Date: 

01/01/2002

First Coupon Date: 

07/01/2002

Last Coupon Date:

07/01/2006

Maturity Date:

01/01/2007

Lot 1

Trade Date 

01/01/2002

Settle Date 

01/01/2002

Par

100,0000

Price 

95

The following table compares how Eagle Accounting calculates amortization for each Amortization/Accretion Method for this scenario. Each row represents a coupon date through maturity.

Start of Business Day

CY1

CY2

LY1

LY2

LD1

LD2

SL

SLA

Start of Business Day

CY1

CY2

LY1

LY2

LD1

LD2

SL

SLA

Yield

11.337435118341

11.337435118341

11.337435118341

11.337435118341

11.466468077718

11.305503612078

11.337435118341

11.337435118341

01/01/2002
(End of Date)

13.28

21.29

21.40

21.29

20.66

18.01

27.78

27.38

07/01/2002

3,852.82

3,852.82

3,852.82

3,852.82

3,826.18

3,352.34

5,000.00

4,956.19

01/01/2003

7,924.04

7,924.04

7,924.04

7,924.04

7,874.91

7,811.08

10,000.00

9,994.52

07/01/2003

12,226.05

12,226.05

12,226.05

12,226.05

12,159.15

11,613.76

15,000,00

14,950.71

01/01/2004

16,771.93

16,771.93

16,771.93

16,771.93

16,692.59

16,556.93

20,000.00

19,989.05

07/01/2004

21,575.50

21,575.50

21,575.50

21,575.50

21,489.72

21,172.46

25,000.00

24,972.62

01/01/2005

26,651.37

26,651.37

26,651.37

26,651.37

26,565.89

26,676.14

30,000.00

30,010.95

07/01/2005

32,014.98

32,014.98

32,014.98

32,014.98

31,937.32

31,566.49

35,000.00

34,967.14

01/01/2006

37,682.64

37,682.64

37,682.64

37,682.64

37,621.19

37,679.65

40,000.00

40,005.48

07/01/2006

43,671.58

43,671.58

43,671.58

43,671.58

43,635.68

43,204.41

45,000.00

44,961.67

01/01/2007

50,000.00

50,000.00

50,000.00

50,000.00

50,000.00

50,000.00

50,000.00

50,000.00

Note that the CY1, CY2, LY1, and LY2 methods have the same period-to-date values calculated. This occurs because:

  1. In the prior scenario, there is no traded interest. Constant Yield amortization takes traded interest into account when applying amortization, but if you apply Level Yield amortization, it does not take traded interest into account.

  2. Constant Yield 1 and Constant Yield 2 always calculate to the same period-to-date values, but they apply different methodology to derive the daily delta.

  3. Level Yield 1 and Level Yield 2 calculate the same period-to-date information when you purchase the security with full coupon periods.

Scenario for Accrued Interest

If there was accrued interest in a scenario, there would be different values calculated for CY1, CY2, LY1, and LY2:

Coupon Rate

10%

Issue Date

01/01/2002

Dated Date

01/01/2002

First Coupon Date

07/01/2002

Last Coupon Date

07/01/2006

Maturity Date

01/01/2007

Lot 1

Trade Date

01/15/2002

Settle Date

01/18/2002

Par

1,000,000

Price

95

The following table shows the values calculated for each Amortization/Accretion Method on each coupon date through maturity for this scenario where there is accrued interest.

Date

CY1

CY2

LY1

LY2

LD1

LD2

Date

CY1

CY2

LY1

LY2

LD1

LD2

Yield

11.344051709452

11.344051709452

11.347064897884

11.347011056485

11.476172984300

11.313842141438

01/01/2002
(EOD)

14.89

22.14

21.66

21.54

20.92

18.23

07/01/2002

3,631.24

3,631.24

3,530.36

3,532.16

3,497.81

3,065.98

01/01/2003

7,721.45

7,721.45

7,629.21

7,630.86

7,574.48

7,549.24

07/01/2003

12,043.66

12,043.66

11,960.61

11,962.10

11,888.49

11,377.63

01/01/2004

16,611.03

16,611.03

16,537.76

16,539.07

16,453.65

16,348.64

07/01/2004

21,437.46

21,437.46

21,374.59

21,375.72

21,284.58

20,993.52

01/01/2005

26,537.64

26,537.64

26,485.84

26,486.78

26,396.75

26,528.82

07/01/2005

31,927.11

31,927.11

31,887.08

31,887.81

31,806.54

31,452.31

01/01/2006

37,622.27

37,622.27

37,594.76

37,595.27

37,531.28

37,601.35

07/01/2006

43,640.46

43,640.46

43,626.27

43,626.54

43,589.30

43,163.71

01/01/2007

50,000.00

50,000.00

50,000.00

50,000.00

50,000.00

50,000.00

As you can see, Level Yield and Constant Yield have different period-to-date information. (This differs from the previous scenario, where CY1, CY2, LY1, and LY2 had the same period-to-date values.)

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