About Calculating Retrospective Amortization

For debt securities, Eagle Accounting uses the coupon rates on the security master records (or on the Variable Rate table, if the security is a variable rate coupon) for the period being calculated retrospectively. For the period going forward, Eagle Accounting uses the options designated in the entity's amortization rule, and applies those amortization options in the calculation of future cash flows.

It is important to note that Retrospective Amortization:

• Does not apply to average cost portfolios. Retrospective amortization is calculated for each distinct tax lot, and thus cannot be used for average cost, because average cost amortization is calculated at a position level.

• Does not apply to close lots.

• Can only be run for one portfolio and one security in combination.

• Causes a one-time adjustment to the amortization curve of an asset, which appears on the Earn Through Date.

• Causes a one-time adjustment to amortization for lots with converted amortization where the amortization converted does not match Eagle amortization methodology.

Retrospective Amortization and Yield Recalculation

All retro calculations initiate a yield recalculation, except when there is a yield override in effect. If there is a yield override in place for a specific tax lot, Eagle Accounting honors this yield when normal amortization continues, and the yield is not recalculated. 

Amortization for OID Bonds and Adjusted Issue Price

When processing an OID Eligible Bond, the Adjusted Issue Price on the conversion date becomes the target maturity for one amortization stream, and the beginning cost basis for the other stream. Eagle Accounting does not save that beginning cost basis or target maturity on the object, but recalculates them each time, using the adjusted issue price. For O Retro of OID bonds, Eagle Accounting also needs the original Adjusted Issue Price, as of the Original Purchase Date. When O Retro is being run, Eagle Accounting uses the original adjusted issue price to determine both the beginning cost basis and the target maturity. The original Adjusted Issue Price is calculated on the fly, and stored in the Last Retro Adj Issue Price (tag 10468) on the lot. Once retro calculation has ended, Eagle Accounting needs to use the normal Adjusted Issue Price to calculate the beginning cost basis piece. However, Eagle Accounting needs to continue to use the original Adjusted Issue Price to calculate the target maturity. The earnings process looks at tag 10467 on the lot to determine whether the Retro state of the lot is O or C, in order to calculate the target maturity correctly (using the correct adjusted issue price).

Methodology

All retro calculations work in a similar manner. Based upon the retrospective amortization start date, the system pulls in the actual cash flows that have occurred up to the Earn Thru Date of the retrospective calculation. Eagle Accounting then projects out the future cash flows out to the target amortization redemption date based upon the cash flow assumptions found in the amortization rule. Eagle Accounting then discounts those cash flows back to the amortize cost and paid interest as of the retrospective amortization start date to produce the amortization yields. The amortize cost as of the retrospective amortization start date could be the original cost of the tax lot, if an original settlement date or settlement date retrospective calculation is invoked. The amortization yields are then applied to the amortize cost from the retrospective amortization start date up to the earn thru date in order to derive the new amortization/OID LTD amount. The difference between the newly calculation Amortization LTD values and the existing amortization is recognized in the amortization/OID deltas.