ILB Processing Example 1

An entity holds 100,000,000.00 of CUSIP 9182727R8. This security pays a semiannual inflation adjusted coupon payment at 3.5%. The ILB index is 1.15875 on 1/14/2007 and 1.15869 on 1/15/2007. The security pays 2,027,707.50 on 7/15. The calculation follows.

If the accrual on 7/14 used the current day's tips index ratio to calculate the period to date accrual, Eagle Accounting would create a coupon amount that is 105 dollars greater than the expected amount.

Another benefit of using the next day's ILB index ratio methodology is that it allows Eagle Accounting to adhere to the standard recognition of income, from settlement date of the open to settlement date minus one of the disposition. It also allows for a smoother recognition of income. Inflation linked bonds begin earning from settlement date of the open lot, and end earning on settlement date minus one of the close. Open transactions use the settlement date ILB to calculate principal and traded interest values. Similarly, close transactions use the ILB index ratio on settlement date of the transaction to calculate principal and traded interest values. In between these days, recognition of income occurs (earnings).

In order to be fully earned by settlement date minus one, Eagle Accounting uses the following day's trading ILB index ratio to allow for smoother recognition of income. This is illustrated in the following examples.