8.70 Amortization Accretion - SunGard

8.70 Amortization/Accretion

1 Overview .............................................................................................................. 2

2 Straight Line - Taxlots ............................................................................................ 3

3 Straight Line - Average Cost .................................................................................... 5

4 Constant Yield (Scientific) - Taxlots .......................................................................... 7

5 Constant Yield to Call - Taxlots .............................................................................. 10

6 Constant Yield to Effective Maturity - Taxlots ........................................................... 11

6.1 SAMPLE CALCULATION OF CONSTANT YIELD AMORTIZATION ............................................. 11

7 Level-Yield ? Taxlots: Formulas by Number and Year as Applicable ............................. 13

F 1 1986 S. Ed. ? (Yield (given price) with one coupon period or less to redemption) ? F 5 1993 S.

Ed. ................................................................................................................................... 15

Formula 2 1986 S. Ed. ? (Price (given yield) with one coupon period or less to redemption) - F 6

1993 S. Ed. .......................................................................................................................16

F 3 1986 S. Ed. ? (Yield (given price) with more than one coupon period to redemption) - Estimated

Yield F 1993 S. Ed. .............................................................................................................17

F 4 1986 S. Ed. ? (Price (given yield) with more than one coupon period to redemption) - F 7 1993

S. Ed. -.............................................................................................................................18

F 5 1986 S. Ed. - [Yield (given price)] - F 3 1993 S. Ed............................................................19

F 6 1986 S. Ed. - [Price (given yield)] - F 4 1993 S. Ed. ...........................................................19

F 7 1986 S. Ed. - [Yield (given price)] - F 1 1993 S. Ed............................................................20

F 10 1986 S. Ed. - [Odd short first coupon (price given yield)] - [Settlement Date in odd period] - F 8

1993 S. Ed. .......................................................................................................................21

F 11 1986 S. Ed. - [Odd long first coupon (price given yield)] - [Settlement Date in odd period] - F 9

1993 S. Ed. .......................................................................................................................22

F 10 1993 S. Ed. ? (Odd short last coupon - yield (given price)) ? (One coupon period or less to

redemption) ......................................................................................................................23

F 11 1993 S. Ed. ? (Odd short last coupon - price (given yield)) ? (One coupon period or less to

redemption) ......................................................................................................................23

F 14 1993 S. Ed. ? (Odd short last coupon - price (given yield)) ? (More than one coupon period to

redemption) ......................................................................................................................24

F 14 1986 S. Ed. - Zero Coupon ? (Yield (given price) with one quasi-coupon period or less to

redemption) - F 20 1993 S. Ed. ............................................................................................25

F 15 1986 S. Ed. - Zero Coupon ? (Price (given yield) with one quasi-coupon period or less to

redemption) - F 21 1993 S. Ed. ............................................................................................25

F 16 1986 S. Ed. - Zero Coupon ? (Yield (given price) with more than one quasi-coupon period to

redemption) - F 22 1993 S. Ed. ............................................................................................26

F 17 1986 S. Ed. - Zero Coupon ? (Price (given yield) with more than one quasi-coupon period to

redemption) - F 23 1993 S. Ed. ............................................................................................26

F 19 1986 Ed. ? F 25 1993 Ed. (Price (given yield) with two non-zero coupon steps)....................27

Price/Yield Formulas Re-Stated - F 4 1986 S. Ed. - F 7 1993 S. Ed.............................................28

Price/Yield Formulas Re-Stated - F 10 1986 S. Ed. - F 8 1993 S. Ed. ..........................................29

Price/Yield Formulas Re-Stated - F 11 1986 S. Ed. - F 9 1993 S. Ed. ..........................................30

Price/Yield Formulas Re-Stated - F 19 1986 Edition - F 25 1993 S. Ed. .......................................31

Level-Yield Formula - (Yield Given Price)................................................................................33

Level-Yield F - (Price Given Yield) .........................................................................................34

8 Catch-up - Taxlots ............................................................................................... 35

Catch-Up Formula - (Yield Given Price) ..................................................................................35

Catch-Up Formula - (Price Given Yield) ..................................................................................35

9 Yield to Best/Worst .............................................................................................. 36

10

Boundary Processing ...................................................................................... 38

11

Installment (NPV) - Taxlots ............................................................................. 39

Installment (NPV) Formula - (Yield Given Price) ......................................................................42

Installment (NPV) Formula - (Price Given Yield) ......................................................................43

12

FAS91 Effective Interest Method ? SIA Formula 2 Modified For Clean Price ............. 44

13

UNITIZED BOND ............................................................................................ 45

THIS DOCUMENT CONTAINS PROPRIETARY INFORMATION OF SUNGARD ASSET ARENA INVESTMENT ACCOUNTING. NO COPY OR OTHER REPRODUCTION SHALL BE MADE WITHOUT WRITTEN PERMISSION OF SUNGARD.

SYSTEM MANUAL - SECTION 8.70 - AMORTIZATION/ACCRETION OVERVIEW

1 OVERVIEW Amortization is the process of writing down the book value of a bond bought at a premium so that at maturity no loss is generated. Accretion is the reverse. The amount amortized/accreted is distributed or re-invested through income earned. Amortization/accretion, like accruing income, is a fund's way of being more equitable to the underlying holders of the fund by distributing a built-in loss (gain) evenly over time, rather than realizing the full impact at time of sale or maturity. Investment Accounting (InvestOne) currently has five methods of amortizing/accreting: straight line, scientific, level-yield, catch-up and installment (NPV). All methods except the catch-up and installment (NPV) methods have the option of amortizing to call and/or to effective maturity date. The catch-up method amortizes to an expected maturity date provided at the taxlot level. Taxlots must be maintained on positions for which scientific, level-yield, catch-up and installment (NPV) methods of amortization are to be performed.

THIS DOCUMENT CONTAINS PROPRIETARY INFORMATION OF SUNGARD ASSET ARENA INVESTMENT ACCOUNTING. NO COPY OR OTHER REPRODUCTION SHALL BE MADE WITHOUT WRITTEN PERMISSION OF SUNGARD.

SYSTEM MANUAL - SECTION 8.70 - AMORTIZATION/ACCRETION STRAIGHT LINE - TAXLOTS

2 STRAIGHT LINE - TAXLOTS

The computation of straight line consists of taking the discount or premium for which a bond was bought and allocating it evenly over the days between purchase and maturity. For instance, a bond bought at $101 to mature in one year will have -1 * 31/365 = -.084938 worth of amortization at the end of January. The equation is as follows:

DA AA = (RV - C) * DTM

Where:

AA RV C DA DTM

- Amortization/accretion accrued - Redemption value of the par held - Cost of the par held - Days in accrual period - Days from trade date of purchase to the maturity date

The days in the accrual period can be computed in two ways: on purchase date, there is one day of amortization or there is none. If there are no days in the accrual period, then on the maturity date the whole amount will be amortized. If there is a one-day accrual on the purchase date, then the whole amount is amortized the day before maturity date. This option is controlled by the account master amortization option.

The redemption value can be either the maturity value ($100 per $100 par value) or a call or effective maturity value. If the account amortizes to call, then a straight line is taken from purchase date to the first call date after the purchase date. Once a call date is passed, the straight line that will be followed is from the prior call date to the next call date. In the previous formula, that means:

RV C DTM

Becomes the redemption value at the next call date or par times next call value Becomes the value at the prior call date or par times the prior call value Becomes the number of days from prior call to next call

So, to compute the accrued amortization from purchase date, the amortization earned from call date to the position date is computed and is added to the accrued amortization on the call date, which is evaluating the previous formula with call value substituted for the redemption value. Note that no matter how many call dates are before the valuation date, only the one immediately before is needed.

Graphical Representation

THIS DOCUMENT CONTAINS PROPRIETARY INFORMATION OF SUNGARD ASSET ARENA INVESTMENT ACCOUNTING. NO COPY OR OTHER REPRODUCTION SHALL BE MADE WITHOUT WRITTEN PERMISSION OF SUNGARD.

SYSTEM MANUAL - SECTION 8.70 - AMORTIZATION/ACCRETION STRAIGHT LINE - TAXLOTS

On call date 3, the accrued amortization is the sum of A (amortization earned since prior call) plus B (accrued accretion since purchase date). Since amortization is negative and accretion is positive, the result is C.

Since a position in a bond can be obtained by executing several purchases on different dates and unit costs, the total accrued amortization on any given date is the sum of the accrued amortization computed for each of the purchases (taxlots).

If the bond is sold, the corresponding amortization sold must be computed so that gain/loss can be determined:

Gain/Loss = Proceeds - Book

Book

= Original Cost + Accrued Amortization

In other words, gain/loss is part of the premium or discount that was not amortized.

Amortization sold is computed as before with the following exception: the days in the accrual period are computed so that no amortization is sold on the purchase date and the whole amount is sold on the sale date. This is parallel to interest sold/collected. If we consider earned amortization as the parallel of earned income, then

Where:

EA = AAE - AAB + AAS

EA AAE AAB AAS -

Earned amortization for any period Accrued amortization at end of period Accrued amortization at beginning of period Amortization sold

If the option is chosen that on purchase day there is one day of amortization earned, then on the maturity date amortization earned must be zero. In the previous formula, it turns out to be zero since AAE = 0 on maturity, AAB = the total amount of amortization and AAS = the amortization sold is also the total amount.

THIS DOCUMENT CONTAINS PROPRIETARY INFORMATION OF SUNGARD ASSET ARENA INVESTMENT ACCOUNTING. NO COPY OR OTHER REPRODUCTION SHALL BE MADE WITHOUT WRITTEN PERMISSION OF SUNGARD.

SYSTEM MANUAL - SECTION 8.70 - AMORTIZATION/ACCRETION CONSTANT YIELD TO CALL - TAXLOTS

3 STRAIGHT LINE - AVERAGE COST In the previous discussion, the purchase date and the original cost are known for each taxlot; but in an average cost account, this information is not saved. Therefore, a somewhat different approach is taken. Suppose on a conversion date the total position, original cost and amortization are known. Then, in order to compute the accrued amortization on a subsequent position date, it is possible to compute the earned amortization from the conversion date to the next position and add that to the accrued amortization on the conversion position. In other words:

AAN = AAC + EAC-N where:

AAN - Accrued amortization on next position date. AAC - Accrued amortization on conversion date. EAC-N - Earned amortization in the period.

If there are no purchases or sales during the period, then earned amortization can be computed as follows:

EAC-N = (RV - BC ) * DCN/DCM where:

RV - Redemption value of the total par held. BC - Book value on the conversion date which is the cost of par plus the accrued

amortization on conversion date. DCN - Days from conversion date to the next position date. DCM - Days from conversion date to maturity date.

In other words, to compute amortization earned in a period, allocate the discount or premium remaining at the beginning of the period over the remainder of the period.

What happens if there is a purchase in the period? Split the period into two periods, one from prior position date to the purchase date and one from purchase to the next position date. Based on the par held at the beginning, compute the amortization earned to the trade date and add this to the prior accrued amortization. On trade date, the carry value is increased by the par purchased, the cost is increased by the cost of the par but amortization is not affected. Based on this new position, the earned amortization to the next position date can now be computed. Similarly, for a sale the accrued amortization on the sale date based on the initial par is computed. Then the amortization sold is computed as a ratio of the par sold, namely:

AAS = AAA * PARS / PARA where:

AAS - The amortization sold. AAA - The accrued amortization on sale date. PARS - Par sold. PARA - Par held before the sale is applied.

THIS DOCUMENT CONTAINS PROPRIETARY INFORMATION OF SUNGARD ASSET ARENA INVESTMENT ACCOUNTING. NO COPY OR OTHER REPRODUCTION SHALL BE MADE WITHOUT WRITTEN PERMISSION OF SUNGARD.

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download