Step Bond Bifurcation Methods and Yields Example

Set Up Amortization Rules for Step Bonds
Because the variable rates are predetermined for a step bond, Eagle Accounting allows you to recognize all future rates in the calculation of cash flows, or to only recognize the most current variable rate, and use that rate for the projection of future cash flows. The recognition of future cash flows in Eagle Accounting is determined by the value in the Step Bond Utilize Bifurcation Method (tag 3934) field in the amortization rule.
A description of the Step Bond Utilize Bifurcation Method (tag 3934) field, located in the Amortization & Accretion Rules panels, follows. For more information about creating amortization & accretion rules, see Manage Amortization & Accretion Rules.
The following are the options in the Amortization & Accretion Rules panels.
Step Bond Utilize Bifurcation Method (3934)
Bifurcation. Eagle Accounting earnings process will recognize each coupon rate as they become effective for purposes of deriving cash flows and in turn amortization yield.
No Bifurcation Par Restricted. Default. Eagle Accounting earnings process will recognize current and future coupon rates for the purpose of deriving cash flows, and in turn the amortization yield. In the event that amortization/accretion transcends par, Eagle Accounting will amortize to par and stop. This option overrides the Amortization Cap/Floor Method (10130) from the amortization rule.
No Bifurcation Transcend Par. Eagle Accounting earnings process will recognize the current and future coupon rates for the purpose of deriving cash flows, and in turn amortization yields. This option overrides the Amortization Cap/Floor Method (10130) from the amortization rule.






Set Up Reference Data for Step Bonds
When you use step bonds, ensure you set up the security master information and the variable rates as reference data.
Set Up Securities with a Coupon Type Code of Step
Eagle Accounting recognizes a security as a step bond when you set the security's Coupon Type Code (tag 97) option to Step Rate (S). You can use Reference Data Center to do so. For information, see Create and Delete Securities. Otherwise, if you use Issue Viewer, you can use the security entry panels available. For details, see Set Up Securities in Issue Viewer.
Detailed information about the available Coupon Type Code field values appears in About the Coupon and Coupon Type Code Fields. That page describes the Step (S) option as follows:
Step (S). The security has fixed coupon dates, and uses a variable rate based on the security identifier to calculate the coupon for use in earnings. The Step Coupon Type Code assumes that all the coupon rates are known at the time of issue. For securities with a Step Coupon Type, you enter the coupon rates in the Variable Rate panel, and enter rates based on the variable rate security's Primary Asset ID.
When you use the Step Coupon Type, the system then only uses the Coupon Rate field (tag 70) on the SMF for reporting, and it does no processing with that field.
For the Step Coupon Type, in the Amortization & Accretion Rules panel, Eagle Accounting provides the ability to recognize all future coupon rates that apply to the calculation of future cash flows for amortization yield, or to only recognize the most current coupon rate that applies to the calculation of future cash flows for amortization yield. The Step Bond Utilize Bifurcation Method field drives this processing in the Amortization Rule panel.
Set Up Variable Rates
Step bond are securities with a predefined variable rate schedule. Other than the predefined variable rate schedule, step bonds act exactly like variable rate securities. Because the variable rates are predetermined, Eagle Accounting allows you to recognize all future rates in the calculation of cash flows, or to only recognize the most current variable rate, and use that rate for the projection of future cash flows. The recognition of future cash flows in Eagle Accounting is determined by the value in the Step Bond Utilize Bifurcation Method (tag 3934) field in the amortization rule.
For more information about setting up variable rates, see Understand Variable Rates for a Security.


Step Bond Bifurcation Methods and Yields Example
Example Trade Details
Issue Date: 1/1/2005
Maturity Date: 1/1/2035
Trade Date: 6/3/2013
Settle Date: 6/3/2013
Purchase Price: 90
Variable Rates:

The following table compares step bond yields based on the Bifurcation Method selected.

As the previous table shows, if you set the Step Bond Utilize Bifurcation Method option to No Bifurcation Par Restricted or No Bifurcation Transcend Par, Eagle Accounting recognizes all the future cash flows at the time of the trade, and thus Eagle Accounting calculates the same yield throughout the life of the security. By recognizing all the future cash flows in the calculation of amortization yield, Eagle Accounting recognizes more amortization income in the earlier part of the bond's life (the security accrues interest at lower coupon rates up until 1/1/2020). Recognizing more amortization in the earlier part of the bond's life allows you to recognize a smoother stream of total income over the life of the security. As the rates increase, the bond recognizes less amortization. See the following figures.