WRITERS NOTE: add a cross reference to the DBDCST defintion in the REFERENCE Data chapter of the FIPUG. Had to remove it from the table that lists Fixed Income PSTs row for DBDCST.
Discounted securities' yields (for example, T-Bills, Commercial Paper, Bankers Acceptances) are based on a simple discount yield, and do not take into account compounding. Discount securities use SIA Formula 1 to calculate yield. This yield is sometimes referred to as a money market yield, and these securities are set up with a processing security type (PST) of Non-Interest Bearing Discount Bond/Note (DBDCST).
[Redemption value - Price] [Number of days in a year (annual basis)]
Yield = (------------------------------------) * (---------------------------------------------------------)
Price # of Days from Settlement to Maturity
Zero Coupon bonds are securities issued at a discount, and they have a zero coupon rate; they pay no interest. Zero Coupon bonds generally have a Maturity Date that is more than a year and a half out from the issue date. Unlike discount bonds, Zero Coupons do take compounding into account, and are generally issued with a semi-annual compounding yield; therefore, they have a Payment Frequency equal to the standard payment frequency of semi-annual.
Zero Coupon bonds should be set up with a processing security type (PST) of Interest Bearing Debt Instrument (DBIBFD). Or, if it is a Municipal Zero Coupon bond, you can set up Zero Coupon bonds with a processing security type of Interest Bearing Municipal (DBIBMU). Note that a Stripped Bond should be set up to resemble the security from which it was stripped.

Discount SMF Setup Example

Zero Coupon Bond SMF Setup Example

Setting Up Entity/Accounting Basis Options for Discounts

The following options at the entity and accounting basis level apply to discount bonds. For more information, see "Entity-Accounting Basis Elections."

• Short Term Discount Accrual Flag (tag 8919). Indicates how the system accrues interest or accretes a short term discount bond (processing security type of DBDCST). Options include:
  • Amortize. Default. The system accretes the short-term discount bond and posts the accretion as amortization on the subledger and general ledger.
  • Accrue Discount. The system treats the accretion of the short term discount bond as an accrual and posts the accretion as interest income on the general ledger in the accrual fields (Daily, Month to Date, Period to Date, Life To Date). The system also posts the accretion as interest income on the subledger. For the calculation of gain/loss, the system treats the accrual of interest income like accretion of discount. If you elect to accrue short term discount bonds, and use amortization rules where you enable OID processing, you can do the following. Create an amortization rule where the Amortization/Accretion Security Type (tag 3931) field is set to processing security type DBDCST, and disable OID amortization in the Recognize OID (tag 9197) field. Also set the Short Term Price Method (tag 1872) to Cost to avoid double counting of accrual of interest income in the mark to market process.
• Short Term Price Method (tag 1872). Specifies how the system prices short term debt instruments. The system identifies a short term fixed income security if the period from Issue Date to Maturity Date is less than or equal to 365 days; it does not do so by Processing Security Type. Options include:
  • Market. Default. The system prices the short term debt instruments using market prices rather than the amortized cost of the securities. Unrealized gain/loss entries are created.
  • Cost. The system prices the short term debt instruments based on the amortized cost of the securities. No unrealized gain/loss entries are created. You must select a value of Cost if you are processing short term discount accruals.

What if You Set Up a Zero Coupon Bond as a Discount Bond?

In the event that you set up a Zero Coupon as a Discount Bond, Eagle Accounting amortizes the security to redemption price and redemption date, as specified by the amortization rules and the security master data. However, the way that they amortize differs greatly.
If you set up a Zero Coupon bond as a Discount Bond, Eagle Accounting calculates the amortization yield that generates Straight-Line Amortization, rather than a possible Constant Yield or Level Yield Amortization Method. The results of using these different Amortization Methods appear in the following figure. Also, by setting up a Zero Coupon bond as a Discount bond, you recognize amortization income much sooner than if you set it up as a Zero Coupon bond.
Security Master Information for the Zero Coupon Bond/Discount Bond Comparison follows.

Figure 31: Discount Bond versus Zero Coupon Bond Diagram