Set Up Amortization Rules for Convertible Bonds

Eagle Accounting fully supports the processing and amortization of convertible bonds. It offers two methods for deriving the amortization yields for convertible bonds' tax lots purchased at a premium: Stated Redemption Price at Maturity (SRPM) and the Embedded Equity Option Value.

You can choose the method you want to use at the amortization rule level by setting the Convertible Option Price Method field value, as follows. For information about creating and editing amortization & accretion rules, see Manage Amortization & Accretion Rules.

Convertible Option Price Method (tag 3858). Indicates the price methodology to use for convertible securities during amortization. Options include:

• Embedded Equity Option Value. Allows for the separation of the embedded equity option value from convertible bond acquisition cost by deriving the fixed income bond cost and utilizing that for amortization. The calculation for fixed income bond cost is as follows: Fixed Income Bond Cost = Convertible Bond Acquisition Cost - Embedded Equity Option Value. If the fixed income bond cost is at a premium, Eagle Accounting amortizes to the system derived target amortize price at maturity plus the embedded equity option value. The Embedded Equity Option Value is calculated only for market premium purchases. If the tax lot is purchased with market premium and there are call dates and prices and/or put dates and prices, Eagle Accounting includes those values to determine the worst yield date and price and/or best yield date and price. If the resulting worst yield price or best yield price is less than the calculated fixed income bond cost, the system amortizes the convertible bond cost to the worst yield date or best yield date. Amortize to price would be the worst yield price plus the embedded equity option value or best yield price plus the embedded equity option value. If the resulting worst yield price or best yield price is greater than the calculated fixed income bond cost, the system does not amortize the convertible bond cost. If the convertible instrument is not called or put on the worst yield / best yield date, the system determines if the convertible instrument should be amortized to the next best yield or next worst yield. If the convertible bond is purchased with market discount, the system does not calculate an Embedded Equity Option Value for that tax lot and applies standard amortization methodology.

• Stated Redemption Price at Maturity (SRPM). Default. Considers the value of the stock in determining the target amortization price at maturity. The calculation is as follows: Conversion Ratio * Market Value of Underlying Stock/10. The SRPM is calculated only for market premium purchases. If the tax lot is purchased with market premium and there are call dates and prices and/or put dates and prices, Eagle Accounting includes those values to determine the worst yield date and price and/or best yield date and price. If the convertible bond is purchased with market discount, the system does not calculate an SRPM for that tax lot and applies standard amortization methodology.