Understand the Recognize Call Date & Prices Option

The following example illustrates how Eagle Accounting determines the yield for a security that has both call and put features when you use an amortization rule with Recognize Call Date and Prices (tag 3939) set to Yield to Worst Call Date and Recognize Put Date and Prices (tag 3937) set to Yield to Best Put Date.

The process begins by first selecting the redemption date and yield. Then the immediately preceding call or put is examined. If it is a call and the yield to its date and price is lower than the previously selected yield, the call becomes the new selection. If it is a put and the yield to its date and price is higher than the previously selected yield, the put becomes the new selection. Then the next previous call or put is processed in the same way. The process continues until the settlement date for which a yield is needed is reached and all of the puts and calls encountered have been examined. Assuming that the bond issuer and bond holder will each act in its best interest, this method selects the most conservative yield that can be counted on.

The approach is similar to playing a game with the bond issuer. In this situation, a good move for you is one that raises the yield you can receive and a good move for the issuer is one that lowers the yield it must pay for the use of your money. At each put (or call) date, you (or the issuer) have a decision to make: exercise the option or wait for future events. If you expect the future will produce a lower yield than doing the put, you will do the put. If the issuer expects that the future will produce a higher yield for you, it will execute the call. Thus starting with the yield at maturity date, you work backward through the schedule, producing a series of conservative assumptions of future results to compare each preceding call or put to determine if it is likely to be exercised.

Here is an example and the reasoning behind how the final yield was selected. The following table provides a step-by-step walk through of selecting a redemption date for yield calculation from a schedule with both puts and calls.

To determine the yield based on the sample schedule, the following steps occur:

1. Start by calculating the yield to maturity at 1/1/20. If no puts or calls are done, this gives you a yield of 8.759%.

2. At 1/1/15, the issuer knows that the call at a price of 85.9432 and yield of 8.250% is a better deal for the issuer than waiting for the maturity at a price of 100 and yield of 8.759%.

3. At 1/1/14, you know that if you wait until the 1/1/15 call, the issuer will call the security then. You see that you can put the holding at price 85.9432 and yield 8.50% which is better, so you would do it.

4. At 1/1/13, you see that you can put the security giving a yield of 8.0%. You will do better by waiting until 1/1/14.

5. At 1/1/12, the issuer sees that the issuer can call at a yield of 6.40%, clearly better than waiting for you to put on 1/1/14.

6. At 1/1/11, the issuer sees that the issuer can call at a yield of 6.5%. This is worse for the issuer than waiting until 1/1/12 so the issuer plans to wait.

7. At 1/1/10, you see that you can put at yield 7.10% which saves you from having to take the 1/1/12 call at yield 6.40%

8. At 1/1/09, you see that you can put at yield 7.0% but know that you will do better by waiting until 1/1/10.

9. The yield determined by this process is 7.1%.

So, following this method, you know you will never do worse than the call or put yield finally selected, unless you choose to, regardless of what the issuer chooses to do.

Notice that if there are no puts, this method produces the yield to worst call and that if there are no calls, this method produces the yield to best put.

Example 2 - Yield to Best Call with Suspense

A fund elects to amortize premium with the Yield to Best Call with Suspense option selected for the amortization rule's Recognize Call Date and Prices field. The Fund purchases a security at a price of 102. The security has the following call schedule and resulting yield.

The Final results, all the calls above the purchase price of 102 are ignored as amortizing to those call dates and prices would cause Eagle Accounting to go away from Par. Eagle Accounting calculates the best yield based upon the remaining calls. In this scenario, the best yield to call is 7.85198 (maturity date). Eagle Accounting begins amortizing on 01/15/2015, as this is the last call date above the purchase price. Eagle Accounting Date amortizes from 102 down to 100 using a Yield of 7.85198.

Example 3 - Yield to Best Call with Suspense

A fund has elected to amortize to Yield to Best Call with Suspense option selected. Fund purchase a security at a price of 90. The security in question has the following call schedule and resulting yield.

Results. Eagle Accounting amortizes to 01/15/2016 Call Date, as this gives the highest yield. Eagle Accounting amortizes to 01/15/2016 at a price of 100. Eagle Accounting begins to amortize on Settlement Date to 01/15/2016 as the target date.