Accrual of premium/discount and fees

Created by Erik Åkerlund, Modified on Wed, 07 Feb 2024 at 01:41 PM by Teuvo Suoraniemi

For Bonds with premium/discount Treasury Systems do the accrual according to the effective interest method.

For a Bond with fixed interest the given yield is used for the Bond.

For a floating interest rate bond we first calculate the current yield. 

We get the current yield by using current market data to calculate the future cash flows. Then we iterate in order to get the current yield for the bond.  

NPV= Net present value

CF= Investment

CF1 ,CF2 ....=cash flow

n= number of periods

IRR= current yield

Since we need to calculate with all cash flows, the past periods and current interest period, needs to be fixed.

Note! If the interest (coupon) is not fixed the error message ...Date dd/mm/yyyy is before measuring Period Start.... will be shown as a tool tip. 

If a fee also should be calculated with the effective interest method the cashflow will be included in the calculation of the yield.

The accrual is calculated with the compounded yield. 

A factor of the compounded interest per period (expressed in years) is calculated and weighted.

Note! The fee needs to be prepaid. Select 'Effective interest' in the Calculation Schema list. The other option is Linear.

In a report select both fee and bond/loans as deal type. 

The calculated interest will be shown in the yield column. Period fee amount will show the accrued fee eiter according to the effective interest method or linear depending om the setting of the fee. the premium/discount will be shown in the column premium/discount.

The premium/discount is then shown aggregated so at the end it will be the nominal amount- clean price amount. 

The period fee amount shows the aggregated fee amount.

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