Understand the Amortization Rule Change Application Option

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 Rule Change Application (tag 9007) field.

Example: Retrospective/Prospective Amortization Rule Change

The following security purchase was recorded in Eagle Accounting with the trade information that appears below. In this scenario, the entity was set up to use SL Amortization from 01/01/03, and then change to Constant Yield 1 on 01/01/04.

Scenario Data

Trade

Trade Date

01/01/2003

Settle Date

01/01/2003

Par

100,000

Price

97

Security

Coupon

10.000000

Coupon Type Code

Fixed Rate

Day Count Basis

30/360

Payment Frequency

Semiannual

Payment Frequency Code

6_M

Business Day Convention

 

Day of Month Override

 

Interest Payment Timing

Same Day of Month

Long Term Debt Dates

 

Issue Price

100.00000000

Issue Date

20020101

Dated Date

20020101

First Coupon Date

20020701

Last Coupon Date

20070101

Maturity Date

20070101

Maturity Price

100.00

Eagle Accounting has two different ways to handle the amortization rule change. If you specify a:

  • Retrospective amortization rule change, Eagle Accounting recalculates the amortization stream to where it should be, life-to-date, based on the new amortization method. As you can see in the following figure, the retrospective amortization creates a "blip" in the amortization stream as Eagle Accounting "trues up" the position to be where it should be, based on the Constant Yield 1 amortization method.

  • Prospective amortization rule change, Eagle Accounting recalculates the amortization yield of the security, as if it was purchased on the day that the amortization rule changed. Eagle Accounting uses the amortized cost of the day before the amortization rule change.

As you can see in the following figure, a Prospective amortization rule change allows for a smoother stream of amortization, because there is no recalculation of amortization from settlement date. If you enact a Retrospective amortization rule change, Eagle Accounting calculates where the security amortization, life-to-date, should be as of the rule change date, and makes the correcting entry to bring the position back to the yield curve of the bond.

Regardless of when you select an amortization method, Eagle Accounting calculates amortization out to the redemption date and redemption price.

Amortization for Converted OID Positions

If you convert an Original Issue Discount (OID) position that has an Open Unit Price that differs from the Original Price, be aware that Eagle Accounting posts negative amortization.

This occurs because Eagle Accounting takes a prospective approach to amortization when converting lots, and so calculates an Adjusted Issue Price as of the Conversion Settlement Date. For example, suppose an adjusted issue price is 98.43291009, and the open unit price on the conversion transaction is 98.77108358. In this scenario, the position is an acquisition premium wherein Eagle Accounting amortizes from 98.77108358 to 98.43291009 for the Acquisition premium and then Eagle Accounting amortizes OID from 98.43291009 to the Maturity price of 100.

If you want Eagle Accounting to look retrospectively, you can investigate processing retrospective amortization. Retrospective amortization creates an adjusted issue price as of the Conversion Settlement Date and then trues up the position according to where it should be based upon the actual cash flows that transpire.