About Processing ILB Bonds

This section discusses Eagle Accounting's transaction, earnings, and unrealized gain/loss processing methodology for inflation linked bonds.

Eagle Accounting has the following requirements prior to processing ILB transactions:

• The security master record information must be correctly established by populating all of the required fields. Security master record information includes the security master record for the ILB bond, the security master record for the index used to mark to market the change in inflation, and the actual CPI value/user-provided ILB index ratio in the variable rate table.

• CPI values must exist in the variable rate table and consist of enough data to correctly calculate the original ILB index ratio as of original settlement date for converted ILB tax lots. In addition, ILB index ratios must exist as of the settlement dates of each transaction. Eagle Accounting also requires enough future data to calculate the daily ILB Index ratio for each day earnings has been invoked. In the case of as-of transactions, Eagle Accounting automatically runs earnings up to post date of the trade. Therefore, you must have CPI /user-provided ILB Index ratio values in the variable rate table to prevent the failure of earnings.

When processing an open or close tax lot transaction of an inflation linked bond, Eagle Accounting requires you to enter all required fields, and provide an inflation adjusted clean price. There are two reasons for providing a clean inflation adjusted price. First, Eagle Accounting creates a separate value in the transaction record by recording any applicable trade interest bought or sold, and whether that interest is to be cum or ex interest. The need for a clean price is to prevent double counting the interest amount traded. Secondly, Eagle Accounting needs an inflation adjusted price (real price) to calculate the principal cost of the transaction. To do this, Eagle Accounting multiplies the nominal shares * the ILB index ratio * the price of the transaction. The benefit of using inflation adjusted prices in transactions, rather than nominal prices, is that targeted redemption prices, such a maturity or call/ prices, do not have to be adjusted when there is a change in values affecting inflation.

In addition to storing the normal fixed income transaction data, Eagle Accounting stores only the nominal shares and the open ILB index ratio on open transactions. The original inflation adjusted shares are not stored in the Cost object. Each day when the earnings process is invoked, Eagle Accounting tracks the current ILB index ratio and calculates the adjusted inflation linked face on the fly, by multiplying the nominal face by the ILB index ratio. As part of the opening of the tax lot, Eagle Accounting calculates the amount of premium or discount to amortize or accrete over the life of the security, by multiplying the nominal shares by the open ILB index ratio, minus the open current cost.

In addition to the tags described above, Eagle Accounting stores the original open ILB index ratio and the converted ILB income for a converted tax lot. Eagle Accounting uses these two additional fields to derive and store the initial principal of the transaction (stored in the Original Acquisition Cost). Eagle Accounting determines how much of the converted principal cost of an inflation linked bond is amortization, ILB income, and actual principal cost, and in doing so, calculate how much market premium/discount and amortization was amortized.

The following formula is used to calculate the local original principal of a converted tax lot:

The following formula is used to calculate the base original principal of a converted tax lot:

The following formula is used to calculate the initial market premium\discount:

The following formula is used to calculate the remaining amount of market premium/discount:

On settlement date of a tax lot open transaction, Eagle Accounting begins to accrue income. Eagle Accounting views the recognition of earnings as end of day activity. Therefore, no more trade activity occurs on this tax lot and the entity is entitled to the income for that day. This allows Eagle Accounting to be fully accrued by the start of the next trading day. Eagle Accounting stores and tracks amortization, accruals, and inflationary adjustment income separately on the subledger. Remember inflation adjustments affect inflation linked shares and cost of investments for inflation linked bonds.

Eagle Accounting uses the following day's index ratio for the purpose of calculating accruals and inflation income (known in Eagle Accounting as ILB income). The benefit of using the next day's ILB index ratio methodology is that it allows Eagle Accounting to calculate and generate accurate coupon and maturity amounts.

Coupons are created using the period to date accruals on the coupon payment date minus one. ILB coupons are created using the ILB index of coupon date. Therefore, Eagle Accounting needs to accrue the period to date accrual value on coupon date minus one and use the coupon date's ILB index to correctly calculate the coupon. More clearly stated, if a coupon payment date is 1/15, the security needs to be fully accrued by 1/14 using the 1/15 ILB index ratio. If you accrued on 1/14 using the 1/14 ILB index ratio, the coupon does not match the expected amount paid by the issuer on 1/15.

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