5.125 Stepped Coupon Bonds

Transcription

1 5.125 Stepped Coupon Bonds 1 Overview Glossary Of Terms Processing SETUP DEFINING CORPORATE ACTIONS/RATES FOR SCBS... 5

2 1 OVERVIEW This section provides a brief overview of the accounting features and functions for the processing of Stepped Coupon Bonds (SCB). In addition to securities with one coupon rate that pay interest on a periodic payment schedule, there are periodic payment securities that change the coupon rate after a specified amount of time. For example, for the first 10 years, a security may have a coupon rate of 5.50% and for the second 10 years a coupon rate of 7.30%, or a security may have a rate of 0.00% for the first 5 years and 7.30% for the next 25 years. These securities are called Stepped Coupon Bonds because the coupon rates are fixed (unlike variable rate bonds), and generally the coupon rate steps up after a set number of payment periods. As long as the coupons are fixed and the number of payment periods each coupon pays is known, the price and yield can be computed. Within INVEST ONE, each account that is allowed to hold bonds of any type can also hold SCBs and take advantage of the coupon rate step definition and income accruals. 1

3 2 GLOSSARY OF TERMS COUPON RATE STEP SCIENTIFIC AMORTIZATION STRAIGHT LINE AMORTIZATION Scheduled income payments on fixed income bonds are referred to as Coupon Payments. The rate of income, which accrues on these bonds, is referred to as the Coupon Rate and the securities themselves are often referred to as Coupon Bonds. Stated rate of interest (usually stated as an annual percent of the face value or par value of the security). Bonds which carry a stated rate of interest for a period of time, then change to a different, predetermined rate of interest at a predetermined date are referred to as Stepped bonds. The date the rate changes is referred as the Step date. A process by which premium or discount on a bond taxlot is allocated over the life of the bond. Scientific amortization uses a cost yield to maturity formula to compute each valuation period s amortized book value. This results in a consistent cost yield on the taxlot from purchase date to maturity date. A process by which premium or discount on a bond taxlot or holding is allocated over the life of the bond. Straight Line amortization allocates the actual premium or discount amount evenly over the life of the holding from purchase date to maturity date. 2

4 3 PROCESSING 3.1 SETUP Step 1 of 2: The fields pertinent to Stepped Coupon Bonds Processing are shown below. The rest of the data on this screen should be entered with the same considerations as those given in defining other bond-like securities. See Section 5.20, Security Activities for further details. CONSTRAINTS As all interest rate (coupon rate) entries for SCBs are input on the Corporate Actions/Rates (DECR) screen, an edit prevents entry of a non-zero value in the Interest Rate field on BOSB. Short or long first and/or last coupon periods are invalid for SCBs. The issue date and first payment dates must be either zero or, if entered, must conform to the coupon date cycle established via the Payment Frequency (PYMT FREQ) and Payment Month/Day fields. Maturity Date must conform to the coupon date cycle for SCBs established via the Payment Frequency (PYMT FREQ) and Payment Month/Day fields. BOBD Screen: Security Definition - Step 1 NEXT BOBD MODE VIEW FDMP43 * * * SECURITY DEFINITION * * * SECURITY NO SCB SHORT NAME A STEPPED COUPON BOND MODEL SECURITY IND: STATUS DATE STATE CODE INCEPTION DATE REPT/NO... CUSIP (PRICING) NUMBER SCB PRICE CODE... B ASSET GROUP... SB SEGMENT CATEGORY SECTOR INDUSTRY HIGH PRICE RANGE LOW PRICE RANGE SIC CODE.. ISSUER CODE CROSS REF CD. NAICS.. PRIMARY PRICE SOURCE/TYPE.. / PRICING FREQ. D TRANS GENERATION.. Y LAG DAYS LAG DAYS METHOD.. 1 FEDERAL TAX STATUS.. T TAX GROUP... T INCOME CATE MAIN/SUB / 0000 PRICE INDEX SCTY. CAL. BACKUP PRICE SOURCE/TYPE.. / 1ST ALT PRICE SOURCE/TYPE.. / 2ND ALT PRICE SOURCE/TYPE.. / 3RD ALT PRICE SOURCE/TYPE.. / FORM 13F FLAG. Y EXCLUDE MGT FEES N EXCLUDE FROM EXP CAP.. TOC.. ISSUE CURRENCY.. PREC... COUNTRY OF: RISK.. TAXATION. INCOME CURRENCY.. PREC... GUARANTOR... ISSUED SCTY... N TRADE CURRENCY.. PREC... PRICE GROUP.. PRICE PROTECT.. N EMU SCTY.. EMU DATE.. RPT SCTY FRANKED/UNFR. BID/OFF SPREAD% PEP STATUS.. N GL-CODE.. 00 SWP=> 1 PRICE CODE ASSET GROUP Valid values are: B - Bond like (price stated as percent of par) C - Market equals amortized cost M - Market equals price U - Market equals shares Valid values are: SM - Municipal stepped bond SB - Stepped bond A User-defined Asset Group may also be used as long as the base asset group 3

5 is SM or SB. See also Section User Defined Asset Groups. Step 2 of 2: The rest of the data on this screen should be entered with the same considerations as those given in defining other bond-like securities. See Section 5.20, Security Activities for further details. NEXT BOSB MODE VIEW FDMP46 * * * SECURITY DEFINITION - BOND * * * SECURITY NO: SCB A STEPPED COUPON BOND BOND CODE.1 1ST PWDN DATE.. ACCR METH.A ACCR OPT. INT PUR. FIRST COUPON DATE ISSUE DATE INTEREST RATE MATURITY DATE COMPOUNDING OPT. PYMT FREQ... S PAYMENT MONTH/DAY AMORT/ACCRET. N INFLAT INDEX... DEFAULT DATE.. CPN CC MSTR NOTE FLOOR (000)... 0 ISSUE PRICE MSTR NOTE CEILING (000)... 0 RATING: S AND P MOODYS MATRIX CODE... TBA FLAG.. N ORIGINAL BAL EFF MATY DATE.. CCYY PREPAY.. PAR OUTSTANDING BENCHMARK.. CCYY RATE CHANGE FREQ.. INCREMENT.. BENCHMARK SPREAD... FIRST DATE MONTH-END... ANN RATE TYPE... GNMA GEN.. CONSTANT DTM A-7. DEMAND. 00 AMORT TO EFF MATY DATE... N ACTIVE. Y CLASS OF SHARES 00 REF X CCB DAYS CONTRA EXPENSE... N EFF MATY PRICE.. MATU SEC YIELD: MAX MIN SEC OVR EFF MAT LEN REPORT AS CASH. N PEP EXPIRY EFFECTIVE MATY REF-DATE NOTE: RATES FOR MULTIPLE RATE ITEMS ARE NOT ENTERED HERE SWP=> 1 ACCRUAL METHOD AMORT/ ACCRET SCBs are valid with the following methods only: A - Coupon bond (actual/actual) D - Coupon bond (30/360) O - Canadian Bond (Act/365) R - Coupon bond (actual/360) SCBs are valid with the following methods only: Y - Security qualifies for straight-line amort/ accret S - Security qualifies for scientific amort/accret N - Security does not qualify for amort/accret M - Security qualifies for manual amort/accret 4

6 3.2 DEFINING CORPORATE ACTIONS/RATES FOR SCBS The rest of the data on this screen should be entered with the same considerations as those given in defining other corporate actions/rates. See Section 5.70, Corporate Actions/Rates for further details. CONSTRAINTS The following fields are invalid for SCBs: ORDER RECORD DATE GIVE: X SHARES FOR EVERY X SHARES DECLARATION DATE DIVIDEND NBR TAX RATES: WITH RECL DECR/VSCR Screen: Corporate Actions/Rates NEXT VSCR MODE VIEW FDMP53 * * * CORPORATE ACTIONS/RATES * * * SECURITY NO: SCB A STEPPED COUPON BOND SWP=> 1 COUPON/EX-DATE/EFF-DATE: TYPE: STEP ORDER: 0 PRICE CODE:... B PAY DATE: DIVIDEND FACTOR: RECORD DATE: GIVE: SHRS FOR EVERY SHRS DECLARATION DATE: DIVIDEND NBR: 000 TAX RATES: WITH.. RECL.. COUP/EX PAY DATE TYPE DIVIDEND FACTOR DEC DATE REC DATE ORD DIV# WITHLD RECLAIM CONVERSION 06/01/05 06/01/05 0 STEP /01/02 06/01/02 0 STEP COUPON/EX- DATE/EFF-DATE PAY DATE TYPE The date the coupon rate steps to the new rate. This is the first date at which income accrues at the new rate. This date must agree with the Bond s established coupon payment cycle (per the Security Definition Bond (BOSB) screen. Must equal the COUPON/EX-DATE/EFF-DATE. The coupon payment date is determined by the payment cycle (Payment Frequency (PYMT FREQ) and Payment Month/Day fields per the Security Definition Bond (BOSB) screen). SCBs are valid with the following TYPE only: STEP Stepped rates PREVENTING A DECR ERROR CONDITION There is an edit on DECR to prevent more than two non-zero interest rates over the life of a step bond, but there is no edit to prevent the bond from being issued or acquired before the first interest rate takes effect. Therefore it is possible to issue or acquire the bond while the interest rate is effectively zero (which counts as the 1st rate) and to have 2nd and 3rd rates 5

7 defined via DECR. This causes unreliable results where yield calculations are depended on (e.g. SEC Yield, duration, scientific amortization), so it should be avoided. When there is only one rate defined via DECR, and the bond is issued or purchased while the interest rate is effectively zero. These results are reliable. Where Original Issue Discount (OID) amortization processing is involved, the first critical interest rate (which may be zero) counted is the one in effect at issue date. So, the DECR edit can be relied upon to prevent some but not all possible error conditions regarding the number of rates in effect over the life of a Stepped Coupon Bond investment. 6