Mandatory PIK Bond Example Paying in Bond

An example of a mandatory corporate action for a PIK bond that pays in bond follows. That is, you do not specify a cash rate but you specify a baby bond rate.

Add Mandatory PIK Bond Announcement paying in Bond:

• Account PIKDEMO owns 1,000,000.00 of ITSA Limited.

• On 20031220, ITSA Limited pays in kind, based on a 12% Coupon Rate.

On 20031215, Eagle Accounting creates a new lot for the Baby Bond. The new lot has a Trade Date equal to the Ex-Date of the corporate action, and a Settlement Date of the lot is the Payment Date of the corporate action. In this scenario, the Trade Date is 20031215, and the Settlement Date is 20031220. See the previous figure.

Eagle Accounting creates the new lot par by using the formula:
Baby Bond Par = (Baby Bond Rate / Coupon Rate) * Total Coupon Due as of Coupon Date

The cost of the bond is calculated by the following formula:
Baby Bond Cost = Baby Bond Par * Baby Bond Price

If there is a difference between the Cost of the Baby Bond and the Coupon Amount, the difference is treated as an entry to Income. Also, when the corporate action is run on 20031215, Eagle Accounting creates the accruals for the rest of the period, and posts those accruals as effective on the Ex-Date of the corporate action.

In this scenario, Eagle Accounting creates the following General Ledger entries.