5.120 Amortization/Accretion - docs.sungard.comdocs.sungard.com/InvestOne/140Doc/System_Manual/Section_5/5_120.pdf · Amortization is the process of decreasing the book value of a

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION

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5.120 Amortization/Accretion 1 Overview .............................................................................................................. 1 2 Account Definition .................................................................................................. 2 3 Security Definition ................................................................................................. 5 4 Amortization on Callable Bonds .............................................................................. 10 5 Boundary Processing ............................................................................................ 15 6 Security Level Issue Price OID Processing ................................................................ 17 7 Taxlot Level OID Processing .................................................................................. 44 8 Market Discount at Point of Sale ............................................................................. 52

8.1 MARKET DISCOUNT AT POINT OF SALE: SPECIAL CONDITIONS ............................................ 57 8.2 EXAMPLE: AMORTIZATION TYPE ON VSTA FOR POINT OF SALE SCENARIO .............................. 60

9 Amortization type on TAXLOT Screen: VSTA ............................................................ 62 9.1 EXAMPLE: AMORTIZATION TYPE ON VSTA SCREEN ......................................................... 62 9.2 AMORTIZATION TYPE ON VARIOUS CALLABLE SCENARIOS.................................................. 71

10 Installment Bonds and the Installment (NPV) Amortization Method ........................ 73 10.1 INSTALLMENT BOND SECURITY DEFINITION ACTIVITIES ................................................. 74

10.1.1 Considerations in the Definition of Installment Bonds ................................... 74 11 Installment Bond Processing ............................................................................. 77

11.1 EXAMPLE - THE INSTALLMENT (NPV) AMORTIZATION METHOD APPLIES. ............................... 80 12 The De Minimus Rule ....................................................................................... 89

12.1 EXAMPLE: DE MINIMUS RULE WITHIN INVESTMENT ACCOUNTING (INVESTONE) ..................... 90 13 Amortization of Short Positions ......................................................................... 94 14 FAS91 Compliant Amortization for Mortgage Back Securities ................................. 95

14.1 EFFECTIVE INTEREST METHOD .............................................................................. 97 14.2 ANTICIPATED PREPAYMENTS: DEPP (MORTGAGE BACKED PREPAYMENT RATES) SCREEN .......... 101 14.3 PAYDOWNS ................................................................................................... 104

15 Amortization Methods for Variable and Floating Rate Bonds .................................. 105 15.1 INTEREST RATE BOUNDARIES .............................................................................. 107 15.2 ACCOUNT DEFINITION PENDING CHANGES ............................................................... 109

16 Conversion, Reports and Amortization/Accretion Decision Charts .......................... 112 16.1 REPORTS ..................................................................................................... 114 16.2 ACCRUAL METHODS B, C, T AND N FOR PRICE CODE 'S' .............................................. 115

17 Amortization/Accretion Decision Charts ............................................................. 116 17.1 GENERAL AMORTIZATION/ACCRETION DECISIONS ...................................................... 116 17.2 OID, POINT OF SALE AND DE MINIMUS DECISION FLOWCHARTS .................................. 119 17.3 ACCRUAL METHOD “B”, “C”, “T”, AND “N” SPECIAL CONSIDERATIONS ............................. 130

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION OVERVIEW


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1 OVERVIEW Investment Accounting (InvestOne) has the capability to automatically calculate amortization/accretion based on account and security data entered by the user. Amortization is the process of decreasing the book value of a bond purchased at a premium until the book value is equal to the par value at the time of maturity. As the book value is reduced, it is accounted for as a reduction in net investment income. Accretion is the process of writing up the book value of a bond purchased at a discount. As the book value is increased, it is accounted for as an increase in net investment income. The Amortization/Accretion approach provides a consistent accounting treatment over the life of bond-like assets of the capital gain or loss associated with holding these assets. In this way, at the time of maturity or sale, no gain or loss is realized; and the participants in the fund are treated the same way whether they hold units of the fund when the bond was purchased, when it matured or some time in between. Investment Accounting (InvestOne) currently has three general methods of calculating Amortization/Accretion: • Straight-line: The premium or discount amount associated with the purchase is allocated

evenly over the period from purchase date to maturity date.

• Scientific (constant yield): A cost yield-to-maturity is computed, and the premium or discount amount is allocated in such a way that the cost yield remains constant over the period from purchase date to maturity date.

• Level-Yield: This method is similar to scientific in that it retains a constant yield-to-maturity. However, in cases in which the rate of return on purchased income is excessive, Level Yield achieves a smoother line of amortization than would be computed using the scientific method

Three more specialized methods are also available. These are: • The catch-up method for REMICs: (that is, bonds defined as having accrual methods “A”

or “D” and asset group “RE”), which computes a cost-yield-to-expected-maturity and then keeps this yield constant.

• The installment (NPV) method for installment bonds: (that is, bonds having accrual methods “A” or “D” and asset group “IB”), which computes the net present value of all future cash flows and amortizes from the composite net present value at the prior cash flow date to the composite net present value at the next cash flow date (continuing this process over the entire life of the corresponding taxlot).

• The manual input of amort/accret: allows the user to specify the daily amount of market premium or discount and/or OID to be accrued.

For details regarding the specific calculations involved in each of these methods of amortizing/ accreting, see (Appendix) Section 8.70, Amortization/Accretion.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION ACCOUNT DEFINITION


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2 ACCOUNT DEFINITION To define an account to accrue amortization/accretion, request the Account Definition (AAAD) screen in CHANGE mode (for the account to be changed) and select the desired method of amortization/accretion by entering one of the following codes in the AMORT/ACCRET METHOD field: 0 No amortization or accretion. 1 Straight-line, installment (NPV) amortization on qualifying securities; no accretion. 2 Straight-line, installment (NPV) accretion on qualifying securities; no amortization. 3 Straight-line, installment (NPV) amortization and accretion on qualifying securities. 4 Scientific, level-yield, straight-line, catch-up, installment (NPV) amortization on

qualifying securities; no accretion. 5 Scientific, level-yield, straight-line, catch-up, installment (NPV) accretion on qualifying

securities; no amortization. 6 Scientific, level-yield, straight-line, catch-up, installment (NPV) amortization and

accretion on qualifying securities. 7 Straight-line, installment (NPV) amortization only on qualifying tax-exempt securities;

straight-line, installment (NPV) accretion only on qualifying taxable securities. 8 Scientific, level-yield, straight-line, catch-up, installment (NPV) amortization only on

qualifying tax-exempt securities; scientific, level-yield, straight-line, catch-up, installment (NPV) accretion only on qualifying taxable securities.

Note: The scientific, level-yield and catch-up methods are valid only for taxlot accounts. If straight-line amort/accret is to be performed in the account for any securities, the entry in the AMORT OPTION field must also be considered. Valid values for this field are:

Blank

Straight-line amort/accret begins on the day after trade date of purchase and end on maturity date.

1

Straight-line amort/accret begins on the trade date of purchase and end on the day before maturity.

2

Straight-line amort/accret begins on the contractual settle date of purchase and end on the day before maturity.

The entry in the PRICING PROCESSING CODE field must also be considered. For an account having amortization/accretion, one of the following codes must be used:

* Defaults to PRICE CODE associated with each individual security held by the account. A 61-day pricing rule applies. Z Bonds are priced at book; stocks are priced at market. E

Bonds purchased at a discount are priced at cost plus accretion, all other bonds are priced at book and all other securities use the price code associated with the Security Master.



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To include or exclude amort/accret on a particular set of securities, isolate the securities by accrual method(s) as seen on the BOSB Screen. Up to sixteen such accrual methods in the ACCR METHODS field may be specified. In the T/NT field, enter “T” to amort/accret accrual methods or “N” not to amort/accret accrual methods. To exclude amort/accret on a particular set of securities, the securities by asset group(s) as seen on the Security Definition (BOBD) screen use the Account/Asset Group Override Screen. Up to 500 asset groups may be specified. See Section 5.30, Account Activities for details on the use of the AAGO screen. For average cost accounts that cannot have gain/loss, the GAIN/LOSS CODE FOR AMORT/ACCRET field should be checked at this time and its value changed, if necessary. Valid values are:

0 At time of sale, any difference between proceeds and amortized cost is added to amortization.

1 At time of sale, any difference between proceeds and amortized cost is treated as gain/loss.

In the following example, a taxlot account (TAX METHOD “H”) is defined as qualifying for scientific, level-yield, straight-line, installment (NPV) and catch-up amortization and accretion (AMORT/ACCRET METHOD “6”). For those securities on which straight-line amort/accret is to be computed, the accrual of amort/accret is to begin on trade date of purchase (AMORT OPTION “1”). Amort/accret is not to be computed for securities having accrual methods “C”, “T” or “N” (ACCR METHODS “CTN” and T/TNT “N”). Market value reflects book value on bonds and is computed from market price on stocks (PRICE PROCESSING CODE “Z”):

NEXT AAAD MODE CHANGE FDMP03 * * * ACCOUNT DEFINITION * * * ACCOUNT NO.......... 000000009203100 SHORT NAME THE BALANCED FUND MODEL ACCOUNT NO.... REPORTING PRIORITY CODE............ STATUS...E A STATUS DATE....06 30 94 RPT-ACC NO: INCEPTION.................. 12 31 91 VERIFICATION................ 05 31 94 BALANCE.................... 06 30 94 SCHEDULE.................... 06 30 94 POSN LEVEL PRICING ACT DATE 00 00 00 DATA SOURCE. M FISCAL YEAR END. 12 POSITION TOLERANCE (SHRS)..... 0.00 TAX METHOD..... H TAXLOT CODE.... INCOME PROCESSING CODE.. D FAS91.. ADVISOR ACCOUNTING................ PRICING PROCESSING CODE........... Z COST ASSIGN... F TRADE OVER.... GNMA GEN... N WASH SALE ADJ GEN... ACCOUNT TYPE...................... TRAN GENERATION.. LAG DAYS... 0000 TRAN GENERATOR "TO-DATE".... FUND CATEGORY. FUND GROUP. OLDEST EFFT DATE CAPTURED... AMORT/ACCRET METHOD 6 DE MINIMUS N GAIN/LOSS CODE FOR AMORT/ACCRET.... 1 ACCR METHODS T/NT ACCR INC OPT TAXLOT FOR ACCR T/N. ACCT INDICATOR. G/L PROFILE... GROUP ACCOUNT NO.... 000000000000000 AMORT TO CALL.. BOUNDARIES.... 0 OVERRIDE FUTURES SCTY G/L TREATMENT AMORT OPTION... 1 AMORT SHORT... PROJ TAX RATE.. ADJUST INC CODE.. N OID. 0 MOD YTM. 0 POINT OF SALE. N TAX GROUP...... E CONFIRM DEFAULT.. C TEST AC. ALT SS PROC. N A/A YLD. CALENDAR...... CORP-ACT PROCESS. N

With the desired Account Definition changes made, press ENTER.

PURCHASE PREMIUM AND DISCOUNT ACCRUALS • For an account doing both amortization and accretion (or neither) and a security having

accrual method “B”, “C”, “N” or “T”, that also does not qualify for amortization/accretion for this account, any purchase premium or discount is accrued as income.

• For an account doing only amortization or only accretion for a qualifying security having one of these accrual methods (for example, straight-line amortization only or straight-line amortization only on tax-exempt and straight-line accretion only on taxable), a premium or



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discount purchase that does not qualify for amortization/accretion is not accrued as income (that is, becomes gain (loss) at maturity).

• For an account electing OID and/or Market Discount at Point of Sale processing (addressed in their respective sections), discounts or premiums are NEVER accrued as income for accrual methods “B”, “C”, “N” or “T” and, therefore, must be accrued as amortization/accretion or will become gain (loss) at disposition.

See Conversion, Reports and Amortization/Accretion Decision Charts for special considerations regarding bond accrual methods “B”, “C”, “N”, and “T”. See Section 5.30 Account Setup for additional information on the Account/Asset Group Override (AAGO) function. NOTE: Pricing processing code “E” records the accretion of discount as unrealized gain. The unrealized gain becomes realized when the discount bond is sold or matures. Manual Input of Amortization/Accretion These rules apply to manual input of amort/accret:

• It requires taxlot level amortization (TLA) processing. • It ignores all account level options related to amort/accret.

See Section 5.200, Manual Input of Amortization for further discussion on manual input of amort/accret.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION SECURITY DEFINITION


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3 SECURITY DEFINITION The default value of the AMORTIZATION/ACCRETION field as seen on the BOSB Screen (AMORTIZATION/ACCRETION “N”) disqualifies the bond from any method of amortization/accretion. At the individual security definition level, the value of this field may be changed by requesting the Security Definition - Bond (BOSB) Screen in CHANGE mode for a given security to be changed and entering one of the following codes in the AMORTIZATION/ACCRETION field:

Code Meaning Y For accounts with amort/accret, this security qualifies for straight-line amort/accret. I For accounts with amort/accret, this security qualifies for installment (NPV)

amort/accret. S For accounts with scientific, level-yield, installment (NPV) and catch-up amort/accret,

this security qualifies for scientific amort/accret; for accounts with only straight-line and installment (NPV) amort/accret, this security qualifies for straight-line amort/accret.

L For accounts with scientific, level-yield, installment (NPV) and catch-up amort/accret, this security qualifies for level-yield amort/accret; for accounts with only straight-line and installment (NPV) amort/accret, this security qualifies for straight-line amort/accret.

C For accounts with scientific, level-yield, installment (NPV) and catch-up amort/accret, this security qualifies for catch-up amort/accret; for accounts with only straight-line and installment (NPV) amort/accret, this security qualifies for straight-line amort/accret.

M This security qualifies for manual input of amort/accret regardless of account options. N This security does not qualify for amort/accret.



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In this example, a security is defined as qualifying for scientific amort/accret for accounts having scientific, level-yield, installment (NPV) and catch-up amort/accret, and straight-line amort/accret for accounts having only straight-line and installment (NPV) amort/accret. For non-amortizing accounts, this security does not qualify for amort/accret:

NEXT BOSB MODE CHANGE FDMP46 * * * SECURITY DEFINITION - BOND * * * SECURITY NO: 912820CN6 UST 12.625 BOND CODE .2 1ST PWDN DATE.. ACCR METH.A ACCR OPT. INT PUR. FIRST COUPON DATE .......... 00 00 00 ISSUE DATE ................. 00 00 00 INTEREST RATE ... 12.625000000 MATURITY DATE ............ 05 15 1995 COMPOUNDING OPT.. PYMT FREQ.. S PAYMENT MONTH/DAY ............. 05 15 AMORT/ACCRET.. S 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... 0.00 EFF MATY DATE.. CCYY PREPAY.. PAR OUTSTANDING.. 0.00 BENCHMARK.. CCYY RATE CHANGE FREQ.. INCREMENT.. BENCHMARK SPREAD ......... 0.00000 FIRST DATE.. 00 00 00 MONTH-END... ANN RATE TYPE ....... GNMA GEN .. CONSTANT DTM 0000..2A-7. DEMAND. AMORT TO EFF MATY DATE.. N ACTIVE.. Y CLASS OF SHARES 00 REF X CCB DAYS... CONTRA EXPENSE... N EFF MATY PRICE.. 100.0000 MATU SEC YIELD: MAX. 0.000000 MIN. 0.00 SEC OVR EFF MAT LEN 0.00000 REPORT AS CASH. N PEP EXPIRY 00 00 00 EFFECTIVE MATY REF-DATE... 00 00 00 NOTE: RATES FOR MULTIPLE RATE ITEMS ARE NOT ENTERED HERE SWP=> 1

With the desired Security Definition changes made, press ENTER.



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In the following example, a security is defined as qualifying for level-yield amort/accret for accounts having scientific, level-yield, installment (NPV) and catch-up amort/accret, and straight-line amort/accret for accounts having only straight-line and installment (NPV) amort/accret. For non-amortizing accounts, this security does not qualify for amort/accret:

NEXT BOSB MODE CHANGE FDMP46 * * * SECURITY DEFINITION - BOND * * * SECURITY NO: 912820CN6 UST 12.625 BOND CODE .2 1ST PWDN DATE.. ACCR METH.A ACCR OPT. INT PUR. FIRST COUPON DATE .......... 00 00 00 ISSUE DATE ................. 00 00 00 INTEREST RATE ... 12.625000000 MATURITY DATE ............ 05 15 1995 COMPOUNDING OPT.. PYMT FREQ.. S PAYMENT MONTH/DAY ............. 05 15 AMORT/ACCRET.. Y INFLAT INDEX..... L 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... 0.00 EFF MATY DATE.. CCYY PREPAY.. PAR OUTSTANDING.. 0.00 BENCHMARK.. CCYY RATE CHANGE FREQ.. INCREMENT.. BENCHMARK SPREAD ......... 0.00000 FIRST DATE.. 00 00 00 MONTH-END... ANN RATE TYPE ....... GNMA GEN .. CONSTANT DTM. 0000 2A-7. DEMAND. AMORT TO EFF MATY DATE.. N ACTIVE.. Y CLASS OF SHARES 00 REF X CCB DAYS... CONTRA EXPENSE... N EFF MATY PRICE.. 100.0000 MATU SEC YIELD: MAX. 0.000000 MIN. 0.00 SEC OVR EFF MAT LEN 0.00000 REPORT AS CASH. N PEP EXPIRY 00 00 00 EFFECTIVE MATY REF-DATE... 00 00 00 NOTE: RATES FOR MULTIPLE RATE ITEMS ARE NOT ENTERED HERE SWP=> 1

Note: For zero-coupon discount securities (PRICE CODE “Z”), AMORTIZATION/ACCRETION must be “N”. Where AMORT/ACCRET METHOD “7” or “8” (as seen on the Account Definition (AAAD) screen) is involved, an additional indicator at the security definition level further determines qualification for amortization/accretion. On the Security Definition (BOBD) screen, the value of the FEDERAL TAX STATUS field identifies the security as either taxable or tax exempt. Valid values for this field are:

T Taxable.

E Tax exempt.

A Alternate minimum taxable (for purposes of amort/accret, treated as tax exempt). A final security definition-level option pertaining to amortization/accretion is to amortize/accrete to effective maturity date and price (not valid for catch-up or installment (NPV) amort/accret). If this option is selected, acquisitions prior to effective maturity date are amortized/accreted to effective maturity date and price; acquisitions on or after effective maturity date are amortized/accreted to (actual) maturity date. The AMORT/ACCRET TO EFF MATY DATE field value determines how EFFECTIVE MATURITY DATE and EFFECTIVE MATURITY PRICE is acknowledged for amortization/ accretion purposes. Valid values for this field are:

Code Meaning N or P Do not acknowledge EFFECTIVE MATURITY DATE or EFFECTIVE MATURITY PRICE for purposes

of calculating amortization/accretion.

Y Substitute EFFECTIVE MATURITY DATE for (actual) MATURITY DATE and EFFECTIVE MATURITY PRICE for redemption value for amortization/accretion purposes unless EFFECTIVE MATURITY DATE has been reached, in which case amortize/accrete to (actual) MATURITY DATE with a redemption value of 100.0000.



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Code Meaning E For amortization/accretion purposes, substitute EFFECTIVE MATURITY DATE and value for stated

MATURITY DATE and value in all calculations (unless EFFECTIVE MATURITY DATE has been reached/passed in which case freeze amortization/accretion at the value as of EFFECTIVE MATURITY DATE).

Valid values for EFFECTIVE MATURITY PRICE are 000.0001 to 200.0000, inclusive. Once it has been determined which amort/accret method (if any) is desired on each security, required Security Definition (BOBD) and Security Definition - Bond (BOSB) changes should be made accordingly.

DEFAULT DATE DEFAULT DATE is the Effective Date a security announced the default took place. Depending on the account's Default Option, as viewed on Account Characteristics (AACS), the account may elect to suspend the amortization or accretion income when a security is in default. If the Account elects to suspend the amortization and accretion income, the accrued amounts are kept constant from one valuation period to the next. If a new account's Inception Date is after the default date and the account acquires a defaulted security, it has zero amortized/accreted amounts from day one. If there is a holder of the security, the default date may not be zeroed. However, the default date may be re-stated to a future date. If bond has the default date re-stated, then the security resumes the normal amortization/accretion processing. In order for the default date to be effective, the user must sweep the accounts where the security is held. The Transaction/ GNMA Generator does not generate activity for a security in default.

SCIENTIFIC OR LEVEL-YIELD AMORTIZATION FOR BONDS WITH VARIABLE OR FLOATING RATE ACCRUAL Scientific or level-yield amortization methods for bonds with variable or floating rate accrual methods only yield results when a taxlot INTEREST RATE (as seen on the Taxlot View (VSTV) screen) is available. These rates are only available for taxlots established or re-established for bonds with accrual methods “V”, “W”, “E” or “F” and AMORTIZATION/ACCRETION “S” or “L”, as seen on BOSB. A taxlot is established or re-established when its effective date is processed or reprocessed in Inventory. The taxlot interest rate is calculated by annualizing the variable or floating interest rate in effect at the taxlot contractual settle date per the ANNUAL RATE TYPE (see BOSB). If scientific or level-yield amortization/accretion is desired on a taxlot of a bond with a variable or floating rate accrual method that was established in a closed accounting period, then the taxlot must be free-delivered off and free-received back on, to establish a new taxlot in an open accounting period. Tran codes FDEL and FREC may be used for this purpose. Other account and security characteristics then dictate the specific amortization/accretion results seen for the taxlot. Where the result is either scientific or level-yield amortization/accretion, the taxlot interest rate is used as though it was a fixed interest rate, and the bond accrual method is treated as though it were “A” (fixed rate coupon bond (actual/actual)) for all amortization/accretion calculations made over the life of the taxlot. This is only as long as other account and security characteristics qualify the taxlot for scientific or level-yield amortization/accretion. If there is no variable or floating interest rate in effect when a given taxlot is established/re-established, Inventory issues a CS DATE RATE NOT FOUND message that identifies the memo number of the taxlot for which the missing rate was detected. This gives the client a chance to enter the missing rate while the taxlot effective date is still in an open accounting period. A



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missing rate condition is otherwise treated as though the bond had a zero interest rate, for purposes of calculating applicable scientific or level-yield amortization/accretion.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION AMORTIZATION ON CALLABLE BONDS


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4 AMORTIZATION ON CALLABLE BONDS The previously addressed Account and Security Definition characteristics allow for amortization/ accretion to be accrued from purchase price and date to maturity (or, optionally, to effective maturity) value and date. For applicable bonds, Investment Accounting (InvestOne) provides account level options regarding amortization from purchase price and date to a subsequent call (or put) value and date. The desired option is elected through the AMORT TO CALL field as seen on the Account Definition (AAAD) screen or the Account/Asset Group (AAGO) screen. Valid values for this field are as follows:

Code Meaning 0 or Blank

Amortize and/or accrete to maturity date and value, ignoring calls and/or puts Default.

1 Amortize and/or accrete to next chronological call or put date and value. 2 Amortize premiums to next call date and value providing the best yield (ignoring

puts; acknowledging calls and maturity); accrete discounts to maturity (ignoring calls and puts); ignore calls and puts for purchases at par.

3 Amortize premiums to next call date and value providing the worst yield (ignoring puts; acknowledging calls and maturity); accrete discounts to maturity (ignoring calls and puts); ignore calls and puts for purchases at par.

4 Amortize premiums to next chronological call or put date and value; where only puts are scheduled (between purchase and maturity) accrete discounts to the put date and value providing the best yield, otherwise, accrete to the call or put date and value providing the worst yield.

5 Amortize premiums to maturity; where only puts are scheduled (between purchase and maturity) accrete discounts to the put date and value providing the best yield, otherwise, accrete to the call or put date and value providing the worst yield.

A

Amortize and/or accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value), ignoring calls and puts.

B

Amortize and/or accrete to next chronological call or put date and value; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value).

C

Amortize premiums to next call date and value providing the best yield (ignoring puts; acknowledging calls and effective maturity); accrete discounts to effective maturity; ignore calls and puts for purchases at par; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value).

D

Amortize premiums to next call date and value providing the worst yield (ignoring puts; acknowledging calls and effective maturity); accrete discounts to effective maturity; ignore calls and puts for purchases at par; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value).



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Code Meaning E

Amortize to next chronological call or put date and value; accrete to call or put date and value providing the worst yield or accrete to put date and value providing the best yield if only puts; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value).

F

Amortize to effective maturity; accrete to call or put date and value providing the worst yield or accrete to put date and value providing the best yield if only puts; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value).

G

Amortize and/or accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case freeze amortization/accretion at the value as of effective maturity date), ignoring calls and puts.

H

Amortize and/or accrete to next chronological call or put date and value; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case freeze amortization/accretion at the value as of effective maturity date).

I

Amortize premiums to next call date and value providing the best yield (ignoring puts; acknowledging calls and effective maturity); accrete discounts to effective maturity; ignore calls and puts for purchases at par; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case freeze amortization/accretion at the value as of effective maturity date).

J

Amortize premiums to next call date and value providing the worst yield (ignoring puts; acknowledging calls and effective maturity); accrete discounts to effective maturity; ignore calls and puts for purchases at par; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case freeze amortization/accretion at the value as of effective maturity date).

K

Amortize to next chronological call or put date and value; accrete to call or put date and value providing the worst yield or accrete to put date and value providing the best yield if only puts; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case freeze amortization/accretion at the value as of effective maturity date).

L

Amortize to effective maturity; accrete to call or put date and value providing the worst yield or accrete to put date and value providing the best yield if only puts; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case freeze amortization/accretion at the value as of effective maturity date).



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If any one of these options is desired, the following account and security level changes should be made: Step 1 of 2: Request the Account Definition (AAAD) screen in CHANGE mode for the account to be changed, and enter the appropriate value in the AMORT TO CALL field. Note: To request per Account/Asset Group use the Account/Asset Group Override (AAGO) screen.

NEXT AAAD MODE CHANGE FDMP03 * * * ACCOUNT DEFINITION * * * ACCOUNT NO.......... 000000009203100 SHORT NAME THE BALANCED FUND MODEL ACCOUNT NO: REPORTING PRIORITY CODE............ * STATUS...E A STATUS DATE.... RPT-ACC NO:... INCEPTION.................. 12 31 91 VERIFICATION................ 05 31 94 BALANCE.................... 06 30 94 SCHEDULE.................... 06 30 94 POSN LEVEL PRICING ACT DATE 00 00 00 DATA SOURCE. M FISCAL YEAR END. 12 POSITION TOLERANCE (SHRS)..... 0.00 TAX METHOD..... H TAXLOT CODE.... INCOME PROCESSING CODE............ D ADVISOR ACCOUNTING................ PRICING PROCESSING CODE........... Z COST ASSIGN...F TRADE OVER..... GNMA GEN... WASH SALE ADJ GEN... ACCOUNT TYPE...................... TRAN GENERATION... LAG DAYS...0000 TRAN GENERATOR 'TO-DATE'.... FUND CATREGORY. FUND GROUP... OLDEST EFFT DATE CAPTURED... AMORT/ACCRET METHOD 6 DE MINIMUS N GAIN/LOSS CODE FOR AMORT/ACCRET.... 1 ACCR METHODS NOT TO AMORT.. CTN ACCR INC OPT TAXLOT FOR ACCR T/N. ACCT INDICATOR. G/L PROFILE... GROUP ACCOUNT NO.... 000000000000000 AMORT TO CALL.. 1 BOUNDARIES.... 0 OVERRIDE FUTURES SCTY G/L TREATMENT AMORT OPTION... 1 AMORT SHORT... PROJ TAX RATE.. ADJUST INC CODE.. N OID. 0 MOD YTM. 0 POINT OF SALE. N TAX GROUP...... E CONFIRM DEFAULT.. C TEST ACCT.. N ALTERNATE SS PROC.. CALENDAR...... CORP-ACT PROCESS. N

Press ENTER to apply the requested change. Step 2 of 2: For each security for which an account is to amort/accret to call (or put), request the Call-Put Date Entry (BOCA) screen in ADD mode, enter the security number and press ENTER. This screen allows the user to add, change, delete, and view the call (or put) date(s) and price(s) for applicable bonds. After entering this information for a given security, press ENTER to apply the requested change. With the additional Account Definition and Security Definition changes addressed in the previous two steps having been made, the conversion to amortization/accretion results in amort/accret from purchase price/date to call (or put) value/date for amortizing securities for which this information has been defined, and amort/accret from purchase price/date to maturity value/date for all other amortizing securities.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION BOUNDARY PROCESSING


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CALL - PUT DATE ENTRY Call and put information (as defined on this screen) is used to compute amortization/ accretion (on designated bonds) for accounts using the AMORT TO CALL option. For accounts not using this option, this information is ignored. Adding, changing or deleting call or put information does not in and of itself cause re-calculations of account balances or position data to occur. To cause such calculations, activity such as transaction entry must occur. Therefore, if the original information defined on this screen is found to be in error, after correct information is entered, the amortization/accretion and other related amounts calculated according to this information can only be re-calculated for open valuation periods. Request the Account Initialization (AAIN) screen and “resweep” the period(s) involved to accomplish this.

SEC CALL DATE AND SEC CALL PRICE FIELDS OVERRIDE If the SEC CALL DATE and SEC CALL PRICE fields are populated, they override BOCA call dates and call prices, CCB Days, and any other applicable fields used to compute the SEC Yield. These fields do NOT impact amortization accruals, and function in a manner similar to the CCB Days field on the BOSB screen for the call portion of the yield to maturity (YTM) method of determining income. These fields are strictly for the use in the computation of the SEC Yield and in no way impacts amortization accruals or any other process in Investment Accounting (InvestOne). Note that the same edits apply for these two fields as is applied for the regular call date and call price fields (for example, SEC CALL DATE must be less than the maturity date of the security, SEC CALL PRICE must be between 0.0001 and 200.0000, etc.)

AMORT TO CALL VALUES ON AAAD OR AAGO The Account Definition (AAAD) or Account/Asset Group (AAGO) screens AMORT TO CALL values “2”, “3”, “C”, “D”, “I” and “J” are valid for taxlot accounts only. Where, for a given acquisition, “best” or “worst” yielding call processing is invoked, the next call date to amortize to for premium purchases is analyzed at effective date of original acquisition, at effective date of a taxlot adjustment transaction, and at the point at which a call date being amortized to is passed. Between each of the analysis dates, the path of amortization (that is, date and cost or book value being amortized from and date and value of call or maturity being amortized to) is “locked in” in a BEST/WORST entry, as seen on the Taxlot View (VSTV) screen. AMORT TO CALL values “4”, “5”, “E”, “F”, “K” or “L” are valid for taxlot accounts only and require Boundary Processing (BOUNDARIES is “1” on AAAD or AAGO). When “best” or “worst” yielding call processing is invoked, the next call or put date to accrete to for discount purchases is analyzed at effective date of the original acquisition, at effective date of the taxlot adjustment transaction, and at the point at which the call or put date being accreted to is passed. When “best” or “worst” yielding call processing is invoked and Boundaries processing is “1”, the call dates being used to amortize can be dynamic and not “locked in” for a taxlot in a closed period. If the taxlot is in a closed period, and a new call date/price that is entered on BOCA should be used, it is reflected on VSTV and in the amount amortized. A user bank flag must be activated to allow access to this functionality. Clients should contact their Investment Accounting (InvestOne) Customer Support Representative to request this access. Once the user flag is set, all accounts must be reswept (AAIN) or retranslated (GLTR) to see the amortization changes in an open period(call date/price changes, amort amount changes, etc.)



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CONSTRAINTS • DELETE mode is not valid. To delete an entry (or entries); use the space bar to blank out the

entry (or entries).

• The catch-up, installment (NPV), and manual amortization methods do not support call date processing.

• For fixed income coupon bonds, call/put dates are generally allowed to be off-cycle from regular coupon dates such that an irregular coupon period leading to or from a call/put date may exist. However, such irregular coupon periods should not be defined for stepped coupon bonds (asset groups “SB” and “SM”), as SIA price/yield formula 25 (used for these bonds) does not support irregular coupon periods.

BOCA Screen: Call - Put Date Entry

NEXT BOCA MODE CHANGE FDMP88 * * * CALL - PUT DATE ENTRY * * * SECURITY NO: CALL DATE CALL PRICE P/C CALL DATE CALL PRICE P/C ---------------------------- ---------------------------- SEC CALL DATE SEC CALL PRICE

Field Description. Fields Shaded Gray are Required. SECURITY NO Enter the security number. If a CROSS REFERENCE CODE was defined on the

security, this code can be used instead and must be preceded by “?”.

CALL DATE Enter the call (or put) date in the indicated format. • Must be less than maturity date. • May not be equal to effective maturity date if the security is amortizing to effective

maturity date/value. • Up to twenty call (or put) dates and prices may be defined for a given security.

Duplicate dates are not allowed. Multiple dates/prices may be added, changed, deleted or viewed in a single request. Entries are sorted in date order (from left to right, top to bottom), with the oldest date entry appearing first.

CALL PRICE Enter the call (or put) price associated with the call (or put) date entry to the immediate left. Must be between 000.0001 and 200.0000.

P/C Enter “P” (for put) or “C” (for call) to identify the price entry to the immediate left. Default is “C”. Press ENTER.

SEC CALL DATE Enter the SEC Call Date in the indicated format.

SEC CALL PRICE Enter the SEC Call Price associated with the SEC Call Date entry.

CCB DAYS If a security has been defined with a CCB DAYS value that is greater than zero on BOSB, the CCB DAYS field appears on BOCA for informational purposes.



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5 BOUNDARY PROCESSING Amortization to call/put (AMORT TO CALL is “1”, “2”, “3”, “4”, “5”, “B”, “C”, “D”, “E”, “F”, “H”, “I”, “J”, “K” or “L”) may be restricted by selecting boundary processing (BOUNDARIES is “1” on AAAD or AAGO). Boundary processing establishes a range for acceptable call/put values in the analysis of amortization/accretion to call. These inclusive boundaries are defined as purchase price (original or adjusted cost) and redemption value (100.0000). All calls/puts with a value outside of the boundaries will be ignored for the calculation of amortization/accretion. There is an inherent assumption that the next call/put value selected is greater than the previous value for discount bonds and less than the previous value for premium bonds. 100 Maturity Call2 Call3 Purchase Price Call1

• Account amortizes and accretes. • Call1 is ignored since it exceeds the purchase price boundary. • Call3 is ignored since it is less than the previous valid call value. If the security amortizes/accretes to effective maturity date, the boundaries are purchase price and effective maturity price for purchases prior to effective maturity; effective maturity price and redemption value (100.0000) for holdings maintained or purchased after effective maturity. If effective maturity price is NOT equal to 100.00, then all call/put dates and values between purchase and effective maturity are ignored. 100 Maturity Call2 Effective Maturity Call1 Call3 Purchase Price

• Account amortizes and accretes. • Call1 is ignored since effective maturity price is not equal to 100.00. • Call3 is ignored since it exceeds the effective maturity price boundary.



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NOTES

1. Boundary processing applies only to securities maintaining taxlots. 2. The values within boundaries being amortized from and to are seen on Taxlot View (VSTV)

screen through a Boundary entry. These entries support the accrual of amortization/accretion.

3. Taxlot cost adjustment transactions re-state the original cost boundary. 4. Taxlot amortization adjustment transactions become the “FROM” value. If the amortization

adjustment exceeds the boundaries a warning message ADJUSTMENT EXCEEDS BOUNDARIES - PRESS “ENTER” TO CONFIRM is issued. Call/put selection continues to be based upon the original boundaries.

5. If AMORT TO CALL is “2”, “3”, “4”, “5”, “C”, “D”, “E”, “F”, “I”, “J”, “K” or “L”, then Best/Worst analysis is limited to those call values that fall within the boundaries. Best/Worst entries on the taxlot supersede Boundary entries.

6. Boundary processing does not affect the SEC Yield calculation. 7. OID processing “3” and “4” and Point of Sale processing “C” require boundary processing. 8. In an amort only or accrete only account, the boundary entry is purchase date and cost to

maturity date and par. However, if the security is defined to amortize to effective maturity date, then the boundary entries would be purchase date and cost to effective maturity date and cost; effective maturity date and cost to maturity date and par.

9. See Section 5.30 Account Set up for additional information on the Account/Asset Group Override (AAGO) function.

10. The only amortization method that interest rate swaps, total return swaps and credit default swaps can currently use is straight line. The only other option is NONE amortization method (N) to work in conjunction will all these types of swaps. Amortization method of “N” would imply that given swap does not qualify for amortization or accretion. Straight Line amortization method will still be the default option.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION SECURITY LEVEL ISSUE PRICE OID PROCESSING


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6 SECURITY LEVEL ISSUE PRICE OID PROCESSING For a bond originally issued at a discount to par (that is, an OID bond), the OID processing options available within Investment Accounting (InvestOne) allow for the distinction between original issue discount (that is, OID) and market discount for purposes of accruing such discount(s) as accretion. For such a bond having been defined to Investment Accounting (InvestOne) as qualifying for amortization/accretion, the user may select an option at the account level to have Investment Accounting (InvestOne) analyze what remains of the OID at point of purchase, and to accrue this amount (as accretion) from purchase date to maturity date. An alternate option may be selected to accrue taxable market discount (in addition to OID) to maturity on such bonds purchased at a market discount. The current section discusses the available options pertaining to the accrual of OID and market discount on OID bonds. To accrue remaining OID without accruing market discount, but treat market discount as accretion at point of sale, see Market Discount at Point of Sale, which follows in this section. In order for the calculation of accretion to be at all sensitive to OID analysis, an election must be made at the account level through the OID field on the Account Definition (AAAD) or Account/Asset Group Override (AAGO) screen as follows:

Code Meaning 0 No OID processing; all decisions with regard to amort/accret are to be made without

OID analysis being performed. 1 For OID bonds purchased at a discount to par, accrete remaining OID and taxable

market discount to maturity; for non-OID bonds and/or non-qualifying purchases, all decisions with regard to amort/accret are to be made without OID analysis being performed.

2

For OID bonds purchased at a discount to par, accrete remaining OID to maturity but do not accrete market discount; for non-OID bonds and/or non-qualifying purchases, all decisions with regard to amort/accret are to be made without OID analysis being performed.

3

For OID bonds purchased at a discount to par, accrete remaining OID and taxable market discount to call/put (per the AMORT TO CALL option selected); for non-OID bonds and/or non-qualifying purchases, all decisions with regard to amort/accrete are to be made without OID analysis being performed.

4

For OID bonds purchased at a discount to par, accrete remaining OID to call/put (per the AMORT TO CALL option selected) but do not accrete market discount; for non-OID bonds and/or non-qualifying purchases, all decisions with regard to amort/accrete are to be made without OID analysis being performed.

Where OID processing is selected, only OID bonds qualifying for accretion and purchased at a discount to par are subject to OID analysis. For a bond to be recognized as an OID bond, it must have an ISSUE DATE and a MATURITY DATE, and its ISSUE PRICE must be greater than zero and less than 100. ISSUE DATE, MATURITY DATE, and ISSUE PRICE are defined on the BOSB. To further qualify an OID bond for OID analysis, the AMORTIZATION/ ACCRETION field (also on the BOSB screen) must contain one of the following values:

Code Meaning Y For accounts electing OID processing, this OID bond qualifies for straight-line accretion. S For accounts electing OID processing, this OID bond qualifies for scientific accretion.



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Code Meaning L For accounts electing OID processing, this OID bond qualifies for level-yield accretion.

A qualifying discounted OID purchase will result in the accrual of OID or OID and market discount according to the method of amort/accret defined at the security level and without regard for the amort/accret method (if any) selected in the Account Definition (AAAD) screen. Where OID option “1” or “2” is selected, the accruals are calculated without regard for call and/or put dates, even if the account elects to amortize to call or put on non-OID purchases. Where OID option “3” or “4” is selected, the accruals are calculated with regard for the AMORT TO CALL option selected in the Account Definition (AAAD) or the Account/Asset Group Override (AAGO) screen as follows:

Code Meaning 1 Accrete to next chronological call/put date and value. 4 or 5 Where only puts are scheduled, accrete to best-yielding put date and value, otherwise

accrete to worst-yielding call or put date and value. B Amortize and/or accrete to next chronological call or put date and value; otherwise

amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value).

E Amortize to next chronological call or put date and value; accrete to call or put date and value providing the worst yield or accrete to put date and value providing the best yield if only puts; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value).

F


H


K


L


For a given OID bond, the same method used in the OID analysis is also used to calculate OID accrual and to calculate market discount accrual. For example, if an OID bond qualifies for scientific accretion, the analysis of remaining OID will be performed using the scientific method. Where OID analysis is performed on a bond qualifying for straight-line accretion, the analysis and



19

potential resulting accrual are further sensitive to the AMORT OPTION selected on the Account Definition (AAAD) screen. Valid values for this field are:

Code Meaning Blank Calculate remaining OID and the resulting accrual of OID or of OID and market

discount assuming accrual begins on the day after trade date and full accrual occurs on the maturity date.

1 Calculate remaining OID and the resulting accrual of OID or of OID and market discount assuming accrual begins on trade date and full accrual occurs on the day prior to maturity.

2 Calculate remaining OID and the resulting accrual of OID or of OID and market discount assuming accrual begins on contractual settle date and full accrual occurs on the day prior to maturity.

When both OID and taxable market discount are present for a given acquisition of a coupon bond, and the scientific or level-yield amortization method has been elected for the related security, a final election made at the account definition level controls the precise means by which the calculation of market discount accretion is performed. The election made in the MOD YTM field can potentially impact the rate at which such market discount accretion is earned, whether the market discount is accrued or taken only at point of sale. By default, the yield and price formulas used for the calculation of both OID and market discount accretion on periodic income coupon bonds acknowledge the effects of future income streams by acknowledging the interest rate - for both the OID and market discount accretion yield and price calculations. As an alternative, a modified yield to maturity (or modified YTM) methodology may be elected, whereby the interest rate continues to be acknowledged for the OID yield and price calculations, but is treated as though it were zero for the market discount calculations. Valid values for the MOD YTM field are as follows: 0 - (Default) do not employ modified YTM 1 - Employ modified YTM If elected, MOD YTM “1” affects amortization accrued, sold and earned on only the market discount portion of the total discount associated with a given OID acquisition, and only to the extent of removing the effects of future coupon streams when calculating the “yield given price” or “price given yield” on which the market discount accretion results are based. The logic to determine the existence of the two distinct discount streams (OID and market discount) and the total amount of OID and of market discounts (dependent on such variables as revised issue price, original cost, and redemption value) is not affected by the use of MOD YTM “1”. What is affected is the rate at which the market discount component is earned, as the effects of future coupon streams (or the absence thereof) influence the yield, which in turn influences the rate over time at which the market discount is earned. The use of MOD YTM “1” can only impact results for these periodic income accrual methods:

A Fixed rate coupon bond (actual/actual). D Fixed rate coupon bond (30/360). E Floating rate coupon bond (30/360). O Canadian bond (actual/365). R Fixed rate coupon bond (actual/360). S Gilt-edged bond (actual/365). V Variable rate bond (actual/actual; closing position). W Variable rate bond (actual/actual; opening position).



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For qualifying bonds purchased at a discount to par, OID processing involves an initial analysis to determine the amount of OID that remains to be accrued on the par amount purchased. The analysis is performed by calculating a book value at point of purchase based on the assumption of accruing the OID from issue date and issue price to maturity or to the selected call or put date and value (if applicable). This book value represents a Revised Issue Price extended to the amount of par purchased (or “RIP”) and is calculated using the method of accretion defined on the BOSB Screen or the Account/Asset Group Override (AAGO) screen. If straight-line accretion is chosen, the analysis is also sensitive to whether the calculation of RIP should assume the accrual of OID began on issue date (AMORT OPTION “1” or “2” as seen on the Account Definition (AAAD) screen or the Account/Asset Group (AAGO) screens) or on the day after issue date (AMORT OPTION blank). The RIP amount is calculated as of the day prior to the day on which the accrual of discount is to begin, based on the method of accretion defined to the bond and (for straight-line) the AMORT OPTION selected on the Account Definition (AAAD) screen. Example: If the resulting accrual is to be done using the – Straight-line method beginning on the day after the trade date of purchase.

Then:

RIP is calculated as of the trade date of purchase.

Scientific method (which begins on contractual settle date).

RIP is calculated as of the day prior to contractual settle date.

By subtracting RIP from the amount of par purchased, remaining OID can be determined. A subsequent analysis compares RIP to the cost of the par amount purchased to determine whether all or only a portion of remaining OID is to be accrued. • If cost is equal to or less than RIP, the entire remaining OID has been assumed on the

purchase and is accrued to maturity in a manner consistent with that in which RIP was calculated.

• If cost is greater than RIP, only a portion of remaining OID has been assumed on the purchase and is accrued to maturity.

• If cost is less than RIP, the difference is regarded as market discount. If OID option “1” or “3” is elected on the Account Definition (AAAD) screen, Market Discount on taxable OID bonds and non-taxable OID bonds purchased with trade date after 4/30/93 is accrued. If the OID bond is not taxable and purchased with trade date on or before 4/30/93 and/or OID option “2” or “4” is selected for the account, Market Discount is not accrued.



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For purposes of amort/accret, a bond is identified as taxable if FEDERAL TAX STATUS is “T” (on the Security Definition (BOBD) screen). For a qualifying bond purchased at a discount to par in an account electing to do OID processing, the resulting amort/accret decisions can be summarized by the following conditions:

Condition Is cost = or > RIP ? Is BOBD federal tax status =

T or taxlot trade date > 4/30/93 ? AAAD oid option Result

1 Y Y 1 or 3 A

2 Y N 1 or 3 A

3 Y Y 2 or 4 A

4 Y N 2 or 4 A

5 N Y 1 or 3 B

6 N N 1 or 3 C

7 N Y 2 or 4 C

8 N N 2 or 4 C

RESULT LEGEND: A Accrete remaining OID (cost to par or selected call/put value); there is no market discount.

B Accrete market discount (cost to RIP) and remaining OID (RIP to par or selected call/put value).

C Accrete remaining OID (RIP to par or selected call/put value); do not accrete market discount.

Purchases NOT qualifying for OID processing (for example, a purchase at a premium to par) will result in a RETURN TO NORMAL PROCESSING, meaning amort/accret results will be as though the account had not elected OID processing. See the Notes at the end of this section and the OID Processing Flowcharts for more information regarding RETURN TO NORMAL PROCESSING conditions. Below is some additional information with regards to the Unit Factor and Effective Maturity Price fields and OID processing. A bond is eligible for OID processing when;

• Effective Maturity Price is equal to or below 200.0000 o Unit Factor is set to 1.0000. o Effective Maturity Price must be 100.0000. o Issue Price must be less than 100.0000 and greater than 0.0000

• Effective Maturity Price is above 200.0000 o When Unit Factor is 1.0000 and the Original Issue Price is lower than

Effective Maturity Price and Effective Maturity Price is greater than 200.0000, then the tax lot will be eligible for OID processing.

o The security and/or account must elect to amortize to Effective Maturity Date.

o The tax lot must still be purchased at a discount to Effective Maturity Price.

• Unitized Bond o When Unit Factor is a value other than 1.0000 and Original Issue Price is

lower than Effective Maturity Price, then the tax lot will be eligible for OID Processing.

o The security and/or account must elect to amortize to Effective Maturity Date.



22

o The tax lot must still be purchased at a discount to Effective Maturity Price.

OID functionality recognizes the Effective Maturity Price when it is greater than 200.0000 or for a ’Unitized Bond’ and will calculate the OID values based on the difference between ‘Original Issue Price’ and ‘Effective Maturity Price’.



23

Following are examples of OID processing scenarios corresponding with the three major categories of results (“A”, “B”, and “C”) summarized above. For the first four examples, pertinent security definition data is constant and would be viewed within Investment Accounting (InvestOne) as follows:

NEXT BOBD MODE VIEW FDMP43 * * * SECURITY DEFINITION * * * SECURITY NO 985555OID SHORT NAME AN OID BOND MODEL SECURITY IND: STATUS DATE ................. 05 01 92 STATE CODE......................... 80 INCEPTION DATE............... 05 01 92 REPT/NO:... CUSIP (PRICING) NUMBER...... 985555OID PRICE CODE......................... B ASSET GROUP........................ B SEGMENT......................... 0000 CATEGORY......................... 0000 SECTOR.......................... 0000 INDUSTRY......................... 0000 HIGH PRICE RANGE ............... 5.0 LOW PRICE RANGE................. 5.0- SIC CODE........................ CROSS REFERENCE CODE......... ISSUER CODE................... 985555 TRANSACTION GENERATION............. Y LAG DAYS.. 0000 LAG DAYS METHOD.. FEDERAL TAX STATUS.. T TAX GROUP.... T INCOME CATE MAIN................ 0000 INCOME CATE SUB................. 0000 PRICE SOURCE...................... PRICE TYPE.................... BACKUP PRICE SOURCE............... BACKUP PRICE TYPE............. FORM 13F FLAG. Y EXCLUDE MGT FEES TITLE OF CLASS (CODE)............ ISSUE CURRENCY.. PREC... 2 COUNTRY OF: RISK.. TAXATION. INCOME CURRENCY.. PREC... GUARANTOR... ISSUED SCTY.... TRADE CURRENCY.. PREC... PRICE GROUP.. PRICE PROTECT.. FRANKED/UNFR. BID/OFF SPREAD% 0.000 PEP STATUS.. N SWP=> 1

NEXT BOSB MODE CHANGE FDMP46 * * * SECURITY DEFINITION - BOND * * * SECURITY NO: 985555OID AN OID BOND BOND CODE .1 1ST PWDN DATE.. ACCR METH.A ACCR OPT. INT PUR. FIRST COUPON DATE .......... 03 01 92 ISSUE DATE ................. 09 01 91 INTEREST RATE ... 9.125000000 MATURITY DATE ............ 09 01 1999 COMPOUNDING OPT.. PYMT FREQ.. S PAYMENT MONTH/DAY ............. 03 01 AMORT/ACCRET..L INFLAT INDEX.. DEFAULT DATE.. CPN CC MSTR NOTE FLOOR (000) .... 0 ISSUE PRICE ... 98.75000000 MSTR NOTE CEILING (000) .. 0 RATING: S and P MOODYS MATRIX CODE.... TBA FLAG.. N ORIGINAL BAL... 0.00 EFF MATY DATE.. CCYY PREPAY.. PAR OUTSTANDING.. 0.00 BENCHMARK.. CCYY RATE CHANGE FREQ.. INCREMENT.. BENCHMARK SPREAD ......... 0.00000 FIRST DATE.. 00 00 00 MONTH-END... ANN RATE TYPE ....... GNMA GEN .. CONSTANT DTM. 2A-7. DEMAND. AMORT TO EFF MATY DATE.. N ACTIVE.. CLASS OF SHARES REF X CCB DAYS... CONTRA EXPENSE... EFF MATY PRICE.. MATU SEC YIELD: MAX. 0.000000 MIN. 0.00 SEC OVR EFF MAT LEN REPORT AS CASH. PEP EXPIRY 00 00 00 EFFECTIVE MATY REF-DATE... 00 00 00 NOTE: RATES FOR MULTIPLE RATE ITEMS ARE NOT ENTERED HERE SWP=> 1


EXAMPLE 1


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EXAMPLE 1 Monthly valued account 9203100 elects OID processing option “1” (accrue OID and market discount to maturity), and MOD YTM “0” (do not employ modified YTM). A purchase of security number 985555OID is entered and would be viewed within Investment Accounting (InvestOne) as follows:

NEXT VSTE MODE VIEW FDMP115 TRADE CORRECTION MEMO NUMBER 00031148 ACCOUNT NUMBER.... 000000009203100 THE BALANCED FUND SECURITY NUMBER... 985555OID EFF DT 04 08 92 TR CD BUY DSC CD GST RV EXTERNAL ID. C/S DATE. 04 15 92 A/S DATE. 04 22 92 TR.DATE 04 06 92 W/S FG AN OID BOND SIDE PCKT. B/ID ASST EVNT SRC ADVISOR CODE: SHARES/PAR... 1,000,000.0000 INTEREST RATE............. 9.125 PRICE/SHARE..... 99.250000 MATURITY DATE.............. 09 01 1999 COMM.. 0.00 EFFECTIVE YIELD........... 9.2675913 SEC FEE 0.00 LOC CODE PRIN....... 992,500.00 F/P R/CASH 0.00 S E/M 00 00 0000 INC 11,158.29 COM MEM TC 109,036.68 H/I N SD EX GST PD 0.00 S BROKER. 01 C/BRKR L/S/S C/F C/O ISSUE PR.. 0.00000000 C/I C C/R P/A D/E 0.00 CST ASGN GST RCL 0.00 S AMORTIZATION. 0.00 COST. 992,500.00 CONFIRM. C SWP=>


EXAMPLE 1


25

Since this OID bond qualifies for level-yield accretion and the purchase is at a discount to par, the calculation of RIP involves first calculating a YTM from issue date (09/01/91) and issue price (98.75) to maturity date (09/01/1999), providing a result of 9.3503725. The calculation could be performed on the Bond Calculator (CALC) screen as follows:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985555OID AN OID BOND DATE: 09 01 1991 COMPUTE PRICE OR YIELD: Y TO MATURITY OR CALL: M ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 09 01 91 MATU/CALL DATE.. 09 01 1999 FIRST COUP DATE. 03 01 92 PAYMENT MM/DD... 03 01 INTEREST RATE... 9.12500000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 987,500.00 PRICE........... 98.7500000 YIELD........... 9.3503725 PURCHASED INT... 0.00 NBR PAYM TO MAT 016 NBR ITERATIONS 0003

Given the OID YTM, RIP (988,178.95) is calculated by extending a price given yield result calculated as of contractual settle date of purchase, as follows:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985555OID AN OID BOND DATE: 04 15 1992 COMPUTE PRICE OR YIELD: P TO MATURITY OR CALL: M ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 09 01 91 MATU/CALL DATE.. 09 01 1999 FIRST COUP DATE. 03 01 92 PAYMENT MM/DD... 03 01 INTEREST RATE... 9.12500000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 988,178.95 PRICE........... 98.8178946 YIELD........... 9.3503725 PURCHASED INT... 11,158.29


EXAMPLE 1


26

Because cost is greater than RIP, a portion of OID remains to be accrued. The accrual will be performed using the level-yield method by first calculating a purchase cost YTM (9.2675913) and, keeping this yield constant, extending a price given yield to arrive at book value at any point in the life of the position. (See Section 8.70, Amortization/Accretion for further details regarding scientific and level-yield methodologies). Subtracting the cost amount (992,500.00) from the calculated price given yield extended as of 05/01/92 gives the accrued accretion amount (31.12) as of the 04/30/92 position date, which can be viewed on the Taxlot Amort/Accret (VSTA) screen as follows: Note: Refer to Section 9 for details on Amortization Type field.

Note that since the purchase qualifies for OID processing, the RIP amount calculated as part of OID analysis is displayed on this screen. Note also that in Example 1, there is no market discount (only OID) to be accrued.


EXAMPLE 2


27

EXAMPLE 2 Monthly valued account 9203100 elects OID processing option “1” (accrue OID and market discount to maturity), and MOD YTM “0” (do not employ modified YTM). The cost amount on the purchase of security number 985555OID shown in Example 1 is adjusted (by adjusting the TOTAL PRINCIPAL amount) and would subsequently be viewed in Investment Accounting (InvestOne) as follows:

NEXT VSTE MODE VIEW FDMP115 TRADE CORRECTION MEMO NUMBER 00031148 ACCOUNT NUMBER.... 000000009203100 THE BALANCED FUND SECURITY NUMBER... 985555OID EFF DT 04 08 92 TR CD BUY DSC CD GST RV EXTERNAL ID. C/S DATE. 04 15 92 A/S DATE. 04 22 92 TR.DATE 04 06 92 W/S FG AN OID BOND SIDE PCKT. B/ID ASST EVNT SRC ADVISOR CODE: SHARES/PAR... 1,000,000.0000 INTEREST RATE............. 9.125 PRICE/SHARE..... 98.170000 MATURITY DATE.............. 09 01 1999 COMM.. 0.00 EFFECTIVE YIELD........... 9.4753678 SEC FEE 0.00 LOC CODE PRIN....... 981,700.00 F/P R/CASH 0.00 S E/M 00 00 0000 INC 11,158.29 COM MEM TC 992,858.29 H/I N SD EX GST PD 0.00 S BROKER. 01 C/BRKR L/S/S C/F C/O ISSUE PR.. 0.00000000 C/I C C/R P/A D/E 0.00 CST ASGN GST RCL 0.00 S AMORTIZATION. 0.00 COST. 981,700.00 CONFIRM. C SWP=>

Because the par amount was not changed, the calculation of RIP provides the same result as in Example 1 (988,178.95), based on YTM of 9.3503725. Because cost is less than RIP, all of remaining OID based on RIP (that is, redemption value minus RIP) remains to be accrued. Therefore, the same yield that was used to calculate RIP is kept constant in performing subsequent price given yield calculations on which the OID accrual will be based.


EXAMPLE 2


28

The calculation of OID accrual as of the 04/30/92 position date can be performed by using the Bond Calculator (CALC) screen to calculate an extended price given yield as of 05/01/92:


Subtracting RIP (988,178.95) from the extended price given yield (988,227.84) results in the OID accrual of 48.89. Because the bond is taxable and the account has elected OID processing option “1”, the market discount (that is, RIP minus cost) is also to be accrued. The market discount accrual will be calculated using the level-yield method by first calculating YTM from purchase contractual settle date (04/15/92) and cost (981,700.00) to maturity date (09/01/1999) and RIP (988,178.95), providing a result of 9.3591957. The calculation could be performed in the Bond Calculator (CALC) screen as follows:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985555OID AN OID BOND DATE: 04 15 1992 COMPUTE PRICE OR YIELD: Y TO MATURITY OR CALL: M ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 09 01 91 MATU/CALL DATE.. 09 01 1999 FIRST COUP DATE. 03 01 92 PAYMENT MM/DD... 03 01 INTEREST RATE... 9.12500000 MATU/CALL VALUE. 98.8178950 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 981,700.00 PRICE........... 98.1700000 YIELD........... 9.3591957 PURCHASED INT... 11,158.29 NBR PAYM TO MAT 015 NBR ITERATIONS 0003


EXAMPLE 2


29

Given the market discount YTM, the calculation of market discount accrual as of the 04/30/92 position date could be performed by using the Bond Calculator (CALC) screen to calculate an extended price given yield as of 05/01/92:


Subtracting cost (981,700.00) from the extended price given yield (981,726.79) results in the market discount accrual of 26.79. Summing OID accrual (48.89) and market discount accrual (26.79) provides a combined accrual result of 75.68, which can be viewed on the Taxlot Amort/Accret (VSTA) screen as follows: Note: Refer to Section 9 for details on Amortization Type field.


EXAMPLE 3


30

EXAMPLE 3 If the account in Example 2 had elected MOD YTM “1” (employ modified YTM) rather than having elected MOD YTM “0” (do not employ modified YTM) the results for the OID accrual would be the same as those seen in Example 2, yet the results for the market discount accrual would be different, which is the premise for Example 3. The calculation of RIP and of the OID accrual are exactly the same in Example 3 as they were in Example 2. Because the bond is taxable and the account has elected OID processing option “1”, the market discount (that is, RIP minus cost) is also to be accrued. As was the case in Example 2, the market discount accrual will be calculated using the level-yield method by first calculating YTM from purchase contractual settle date (04/15/92) and cost (981,700.00) to maturity date (09/01/1999) and RIP (988,178.95). However, since security number 995555OID is a fixed income coupon bond and account 9203100 has elected MOD YTM “1” (employ modified YTM), the calculation of the YTM will be done as though the security's interest rate were zero, providing a result of 0.0891808. The calculation could be performed in the Bond Calculator (CALC) screen as follows:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985555OID AN OID BOND DATE: 04 15 1992 COMPUTE PRICE OR YIELD: Y TO MATURITY OR CALL: M ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 09 01 91 MATU/CALL DATE.. 09 01 1999 FIRST COUP DATE. 03 01 92 PAYMENT MM/DD... 03 01 INTEREST RATE... 0.00000000 MATU/CALL VALUE. 98.8178950 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 981,700.00 PRICE........... 98.1700000 YIELD........... 0.0891808 PURCHASED INT... 0.00 NBR-PAYM-TO-MAT= 00015 NBR-ITERATIONS= 0000

(Note that the level-yield method reverts to the use of standard SIA formulas in the calculations of yield and price when the interest rate is zero).


EXAMPLE 3


31

Given the market discount YTM, the calculation of market discount accrual as of the 04/30/92 position date could be performed by using the Bond Calculator (CALC) screen to calculate an extended price given yield as of 05/01/92:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985555OID AN OID BOND DATE: 05 01 1992 COMPUTE PRICE OR YIELD: P TO MATURITY OR CALL: M ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 09 01 91 MATU/CALL DATE.. 09 01 1999 FIRST COUP DATE. 03 01 92 PAYMENT MM/DD... 03 01 INTEREST RATE... 0.00000000 MATU/CALL VALUE. 98.8178950 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 981,738.06 PRICE........... 98.1738058 YIELD........... 0.0891808 PURCHASED INT... 0.00 NBR-PAYM-TO-MAT= 00000 NBR-ITERATIONS= 0000 FORMULA 04 IRRG=N

Subtracting cost (981,700.00) from the extended price given yield (981,738.06) results in the market discount accrual of 38.06. Summing OID accrual (48.89) and market discount accrual (38.06) provides a combined result of 86.95, which can be viewed on the Taxlot Amort/Accret (VSTA) screen as follows: Note: Refer to Section 9 for details on Amortization Type field.


EXAMPLE 4


32

EXAMPLE 4 If either Example 2 or Example 3 were modified by changing the security's FEDERAL TAX STATUS to “E” (tax-exempt) or “A” (alternate minimum tax) and/or the account had elected OID processing option “2” (accrue OID to maturity; do not accrue market discount on OID bonds), the resulting 04/30/92 accrual would reflect OID only (48.89) because the taxlot was purchased before 5/01/93, which could be viewed on the Taxlot Amort/Accret (VSTA) screen as follows: Note: Refer to Section 9 for details on Amortization Type field.

A fifth and final example is presented herein to illustrate OID processing where the bond's call/put schedule and the account's AMORT TO CALL option are to be acknowledged. Where OID processing option “3” or “4” are selected for a given account, AMORT TO CALL option “1”, “4” or “5” and boundaries processing (that is, BOUNDARIES option “1”) must also be selected. Amortization on Callable Bonds, which follows in this section, provides details on these processing options as they apply to Investment Accounting (InvestOne) in general. The options provide the same basic function within OID processing (that is, the control of which call/put events are to be acknowledged for the accrual of discount), but with the following exceptions: • With regard to AMORT TO CALL options “4” and “5”, the “best” or “worst”-yielding event to

initially accrue to is determined based on calculating yields from ISSUE DATE and ISSUE PRICE (rather than purchase date and cost).

• With regard to BOUNDARIES option “1”, the lower boundary is the greater of ISSUE PRICE and cost

(rather than simply cost); the upper boundary is 100 (rather than maturity or effective maturity value per 100 par which, outside of OID processing, may be a value other than 100).



33

EXAMPLE 5 Monthly valued account 9203100 elects OID processing option “3” (accrue OID and market discount to call/put), MOD YTM “0” (do not employ modified YTM) and AMORT TO CALL option “5” along with BOUNDARIES option “1” (within OID processing, if only puts are found as possible events to accrue to from purchase date forward given boundaries implications, then select the best-yielding put as the initial event, otherwise select the worst-yielding call or put). A purchase of security number 985567OID is entered and can be viewed within Investment Accounting (InvestOne) as follows:

NEXT VSTE MODE VIEW FDMP115 TRADE CORRECTION MEMO NUMBER 00042256 ACCOUNT NUMBER.... 000000009203100 THE BALANCED FUND SECURITY NUMBER... 985567OID EFF DT 04 18 92 TR CD BUY DSC CD GST RV 0.00 S EXTERNAL ID. C/S DATE. 04 20 92 A/S DATE. 04 25 92 TR.DATE 04 17 92 W/S FG A CALLABLE/PUTABLE OID SIDE PCKT. B/ID ASST EVNT SRC ADVISOR CODE: SHARES/PAR... 10,000,000.0000 INTEREST RATE............. 6.75 PRICE/SHARE..... 98.170000 MATURITY DATE.............. 12 01 2005 COMM.. 0.00 EFFECTIVE YIELD........... 7.0326653 SEC FEE 0.00 LOC CODE PRIN....... 9,730,000.00 F/P R/CASH 0.00 S E/M 00 00 0000 INC 260,040.98 COM MEM TC 9,990,040.98 H/I N SD EX GST PD 0.00 S BROKER. 01 C/BRKR L/S/S C/F C/O ISSUE PR.. 0.00000000 C/I C C/R P/A D/E 0.00 CST ASGN GST RCL 0.00 S AMORTIZATION. 0.00 COST 9,730,000.00 CONFIRM. C SWP=>



34

Pertinent security definition data can be viewed within Investment Accounting (InvestOne) as follows:

NEXT BOBD MODE VIEW FDMP43 * * * SECURITY DEFINITION * * * SECURITY NO 985567OID SHORT NAME A CALLABLE/PUTABLE OID MODEL SECURITY IND: STATUS DATE ................. 06 30 94 STATE CODE......................... 80 INCEPTION DATE............... 06 30 94 REPT/NO:... CUSIP (PRICING) NUMBER...... 985567OID PRICE CODE......................... B ASSET GROUP........................ B SEGMENT......................... 0000 CATEGORY......................... 0000 SECTOR.......................... 0000 INDUSTRY......................... 0000 HIGH PRICE RANGE ............... 99.9 LOW PRICE RANGE................. 99.9- SIC CODE........................ CROSS REFERENCE CODE......... ISSUER CODE................... 985567 TRANSACTION GENERATION............. Y LAG DAYS.. 0000 LAG DAYS METHOD.. FEDERAL TAX STATUS.. T TAX GROUP.... T INCOME CATE MAIN................ 0000 INCOME CATE SUB................. 0000 PRICE SOURCE...................... PRICE TYPE.................... BACKUP PRICE SOURCE............... BACKUP PRICE TYPE............. FORM 13F FLAG. Y EXCLUDE MGT FEES TITLE OF CLASS (CODE)............ ISSUE CURRENCY.. PREC... COUNTRY OF: RISK.. TAXATION. INCOME CURRENCY.. PREC... GUARANTOR... ISSUED SCTY.... TRADE CURRENCY.. PREC... PRICE GROUP.. PRICE PROTECT.. FRANKED/UNFR. BID/OFF SPREAD% 0.000 PEP STATUS.. N SWP=> 1

NEXT BOSB MODE VIEW FDMP46 * * * SECURITY DEFINITION - BOND * * * SECURITY NO: 985567OID A CALLABLE/PUTABLE OID BOND CODE .1 1ST PWDN DATE.. ACCR METH.A ACCR OPT. INT PUR. FIRST COUPON DATE .......... 12 01 91 ISSUE DATE ................. 06 01 91 INTEREST RATE ... 6.750000000 MATURITY DATE ............ 12 01 2005 COMPOUNDING OPT.. PYMT FREQ.. S PAYMENT MONTH/DAY ............. 06 01 AMORT/ACCRET..S INFLAT INDEX.. DEFAULT DATE.. CPN CC MSTR NOTE FLOOR (000) .... 0 ISSUE PRICE ... 97.25000000 MSTR NOTE CEILING (000) .. 0 RATING: S AND P MOODYS MATRIX CODE.... TBA FLAG.. N ORIGINAL BAL... 0.00 EFF MATY DATE.. CCYY PREPAY.. PAR OUTSTANDING.. 0.00 BENCHMARK.. CCYY RATE CHANGE FREQ.. INCREMENT.. BENCHMARK SPREAD ......... 0.00000 FIRST DATE.. 00 00 00 MONTH-END... ANN RATE TYPE ....... GNMA GEN .. CONSTANT DTM ................... 0000 AMORT TO EFF MATY DATE.. N ACTIVE.. CLASS OF SHARES REF X CCB DAYS... CONTRA EXPENSE...N EFF MATY PRICE.. MATU SEC YIELD: MAX. 0.000000 MIN. 0.00 SEC OVR EFF MAT LEN REPORT AS CASH. PEP EXPIRY 00 00 00 EFFECTIVE MATY REF-DATE... 00 00 00 NOTE: RATES FOR MULTIPLE RATE ITEMS ARE NOT ENTERED HERE SWP=> 1



35

NEXT BOCA MODE REPORT FDMP88 * * * CALL - PUT DATE ENTRY * * * SECURITY NO: 985567OID A CALLABLE/PUTABLE OID CALL DATE CALL PRICE P/C CALL DATE CALL PRICE P/C ---------------------------- ---------------------------- 12 01 2002 098.7500 P 12 01 2003 099.8500 P 12 01 2004 101.0000 C

Since the bond qualifies for scientific accretion and the purchase is at a discount to par, the calculation of RIP involves first determining the initial call/put event to be accrued to. Cost is greater than ISSUE PRICE, so cost becomes the lower boundary (therefore, calls/puts less than cost would be ignored altogether). The upper boundary is 100 (therefore, the 12/01/2004 call at 101.00 is ignored altogether). By eliminating the 12/01/2004 call, only puts remain scheduled as possible events to accrue to (other than maturity), therefore the best-yielding put (or maturity, if best) is selected for the RIP calculation. Based on the following YTM calculation, the 12/01/2002 put at 98.75 yields 7.0302289:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985567OID A CALLABLE/PUTABLE OID DATE: 06 01 1991 COMPUTE PRICE OR YIELD: Y TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 06 01 91 MATU/CALL DATE.. 12 01 2002 FIRST COUP DATE. 12 01 91 PAYMENT MM/DD... 06 01 INTEREST RATE... 6.75000000 MATU/CALL VALUE. 98.7500000 PAR VALUE....... 10,000,000.00 DOLLAR VALUE.... 9,725,000.00 PRICE........... 97.2500000 YIELD........... 7.0302289 PURCHASED INT... 0.00 NBR-PAYM-TOMAT= 00023 NBR-ITERATIONS= 0003 FORMULA 04I IRRG=N



36

Based on the following YTM calculation, the 12/01/2003 put at 99.85 yields 7.0774486:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985567OID A CALLABLE/PUTABLE OID DATE: 06 01 1991 COMPUTE PRICE OR YIELD: Y TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 06 01 91 MATU/CALL DATE.. 12 01 2003 FIRST COUP DATE. 12 01 91 PAYMENT MM/DD... 06 01 INTEREST RATE... 6.75000000 MATU/CALL VALUE. 99.8500000 PAR VALUE....... 10,000,000.00 DOLLAR VALUE.... 9,725,000.00 PRICE........... 97.2500000 YIELD........... 7.0774486 PURCHASED INT... 0.00 NBR-PAYM-TOMAT= 00025 NBR-ITERATIONS= 0002 FORMULA 04I RRG=N

Based on the following YTM calculation, the 12/01/2005 maturity yields 7.0559924:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985567OID A CALLABLE/PUTABLE OID DATE: 06 01 1991 COMPUTE PRICE OR YIELD: Y TO MATURITY OR CALL: M ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 06 01 91 MATU/CALL DATE.. 12 01 2005 FIRST COUP DATE. 12 01 91 PAYMENT MM/DD... 06 01 INTEREST RATE... 6.75000000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 10,000,000.00 DOLLAR VALUE.... 9,725,000.00 PRICE........... 97.2500000 YIELD........... 7.0559924 PURCHASED INT... 0.00 NBR-PAYM-TOMAT= 00029 NBR-ITERATIONS= 0002 FORMULA 04I IRRG=N



37

Given the best-yielding OID YTM (7.0774486, based on the 12/01/2003 put at 99.85), RIP (9,735,876.60) is calculated by extending a price given yield result calculated as of contractual settle date of purchase, as follows:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985567OID A CALLABLE/PUTABLE OID DATE: 04 20 1992 COMPUTE PRICE OR YIELD: P TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 06 01 91 MATU/CALL DATE.. 12 01 2003 FIRST COUP DATE. 12 01 91 PAYMENT MM/DD... 06 01 INTEREST RATE... 6.75000000 MATU/CALL VALUE. 99.8500000 PAR VALUE....... 10,000,000.00 DOLLAR VALUE.... 9,735,876.60 PRICE........... 97.3587660 YIELD........... 7.0774486 PURCHASED INT... 260,040.98 NBR-PAYM-TOMAT= 00000 NBR-ITERATIONS= 0000 FORMULA 04 IRRG=N

Because cost is less than RIP, all of the remaining OID based on RIP (that is, put value minus RIP) remains to be accrued. Therefore, the same yield that was used to calculate RIP is kept constant in performing subsequent price given yield calculations on which the OID accrual is based. The calculation of OID accrual as of the 04/30/92 position date can be simulated as follows:




38

Subtracting RIP (9,735,876.60) from the extended price given yield (9,736,506.34) results in the OID accrual of 629.74. Because the market discount is taxable and the account has elected OID processing option “3”, the market discount (that is, RIP minus cost) is also to be accrued. The market discount accrual is calculated using the scientific method by first calculating YTM from purchase contractual settle date (04/20/92) and cost (9,730,000.00) to the selected put date (12/01/2003) and RIP (9,735,876.60), providing a result of 6.9394446:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: 985567OID A CALLABLE/PUTABLE OID DATE: 04 20 1992 COMPUTE PRICE OR YIELD: Y TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 06 01 91 MATU/CALL DATE.. 12 01 2003 FIRST COUP DATE. 12 01 91 PAYMENT MM/DD... 06 01 INTEREST RATE... 6.75000000 MATU/CALL VALUE. 97.3587660 PAR VALUE....... 10,000,000.00 DOLLAR VALUE.... 9,730,000.00 PRICE........... 97.3000000 YIELD........... 6.9394446 PURCHASED INT... 260,040.98 NBR-PAYM-TOMAT= 00024 NBR-ITERATIONS= 0003 FORMULA 04I IRRG=N

Given the market discount YTM, the calculation of market discount accrual as of the 04/30/92 position date can be simulated as follows:




39

Subtracting cost (9,730,000.00) from the extended price given yield (9,730,216.33) results in the market discount accrual of 216.33. Summing OID accrual (629.74) and market discount accrual (216.33) provides a combined accrual result of 846.07, which can be viewed on the Taxlot Amort/Accret (VSTA) screen as follows: Note: Refer to Section 9 for details on Amortization Type field.

NOTES 1. For an account electing OID processing and/or POINT OF SALE processing, discounts on

bonds having accrual methods of “B”, “C”, “T”, and “N” will NEVER be accrued or collected as income (even in a RETURN TO NORMAL PROCESSING condition). See Conversion, Reports and Amortization/Accretion Decision Charts for special considerations regarding bond accrual methods “B”, “C”, “T”, and “N”.

2. All OID processing is dependent on the bond qualifying for straight-line, scientific or level-yield amort/accret (that is, BOSB AMORT/ACCRET must be “Y”, “S” or “L”. If BOSB AMORT/ACCRET = “N”, “C” or “I”, RETURN TO NORMAL PROCESSING, which in this case means no OID processing, the discount will end up as realized gain at point of sale).

3. If an account elects to do OID processing, the manner in which RIP gets calculated and in which OID potentially gets accrued is dependent on the bond amort/accret qualification (that is, BOSB AMORT/ACCRET “S” or “L” will result in a YTM calculation of RIP, where any resulting accrual of remaining OID will be done in the specified YTM method; BOSB AMORT/ACCRET “Y” will result in a straight-line calculation of RIP based on “T”, “T+1” or “CS” (selected at the account level), where any resulting accrual of remaining OID will be done on a straight-line basis based on “T”, “T+1” or “CS” (selected at the account level)). RIP is calculated as of the day before the potential accrual of discount would begin. For example, if accretion is accrued beginning on contractual settle date, then RIP will be calculated as of the day prior to contractual settle date. If the RIP date is the day prior to ISSUE DATE, the ISSUE PRICE



40

represents RIP per 100 par. If the RIP date is less than ISSUE DATE by more than one day, RETURN TO NORMAL PROCESSING.

4. For any account (whether or not electing OID processing), market discount on non-OID bonds is processed without any special OID considerations in terms of whether or not to accrue the discount and, if the discount is to be accrued, through which method the accrual is to be calculated (that is, RETURN TO NORMAL PROCESSING).

5. For an account electing to do OID processing WITH market discount (that is, OID option “1” or “3”), all accrual of market discount on OID bonds will be dependent on the bond amort/accret qualification (that is, BOSB AMORT/ACCRET “S” or “L” will result in a YTM calculation of any resulting accrual of market discount; BOSB AMORT/ ACCRET Y will result in a straight-line calculation of any resulting accrual of market discount, based on “T”, “T+1” or “CS”, as selected at the account level).

6. For an account electing to do OID processing WITHOUT market discount (that is, OID option “2” or “4”), market discount will not be accrued on OID bonds, as either amortization or income. For such an account, the decision of whether or not to accrue market discount on non-OID bonds will be made without any OID considerations (that is, RETURN TO NORMAL PROCESSING).

7. For ANY account, any discount amount accrued as amortization will also be taken as amort sold at point of sale; any discount amount accrued as income is expected to be taken as income sold at point of sale, or as income collected upon redemption.



41

8. For an OID bond in an account electing OID processing WITHOUT market discount and

electing to do market discount calculation at point of sale, the would-be market discount accrued at point of sale is taken as amort sold (and, therefore, as amort earned) at point of sale (but only to the extent of a gain on such discount), calculated on a basis dependent on the bond AMORT/ACCRET qualification (that is, straight-line, scientific, level-yield or none), where a straight-line result will be based on “T”, “T+1” or “CS”, as selected at the account level. When the calculations are being performed for a coupon bond, a scientific or level-yield result is further dependent on the MOD YTM option elected for the account. Whereas the accrual of market discount on an OID does NOT consider the ISSUE DATE relative to 07/18/84, the POINT OF SALE calculation of un-accrued discount does unless the taxlot trade date is after 4/30/93. For more information regarding the POINT OF SALE option, see Market Discount at Point of Sale in this section.

9. For an OID bond in an account electing OID processing WITHOUT market discount and

electing NOT to do market discount calculation at point of sale, the would-be market discount accrued at point of sale is taken as realized gain at point of sale. For a non-OID bond in ANY account, market discount not having been accrued as either amortization or as income will be taken as realized gain at point of sale, unless calculation of market discount at point of sale is selected at the account level, in which case the would-be market discount accrued at point of sale is taken as amort sold (and, therefore, as amort earned) at point of sale (but only to the extent of a gain on such discount). For more information regarding the POINT OF SALE option, see Market Discount at Point of Sale in this section.

10. OID processing applies only to taxlot accounts and only to holdings for which taxlots are

maintained. OID processing is prevented for average cost accounts. Holdings for securities priced at face (that is, no taxlots) will be processed without any special OID considerations (that is, RETURN TO NORMAL PROCESSING).

11. As Taxlot Adjustment Transactions potentially influence amortization/accretion, they also

potentially influence OID processing. An adjustment to the date on which the accrual of remaining OID is to have started, or to the amount of original cost remaining in the taxlot, would cause a re-analysis of RIP to be performed. A re-analysis of RIP due to a Taxlot Adjustment would be based on the original (or adjusted) date and the original par amount, unless a cost adjustment is in effect, in which case the par amount remaining as of the effective date and entry point in time of the cost adjustment would be used. Taxlot Adjustments may influence a taxlot to such an extent that it is brought into or out of OID processing. For example, cost may be adjusted from an amount representing a premium to an amount representing a discount to par, thereby changing a non-OID scenario into a potential OID scenario.

The TXLAA (Amortization/ Accretion) Taxlot Adjustment transaction will always cause a

RETURN TO NORMAL PROCESSING if used in an OID scenario. See Section 5.200, Taxlot Adjustments for more information on these transactions.

12. OID processing requires that accrued amortization/accretion is maintained at the taxlot level

for the user bank (through the TLA application option).



42

13. Where OID is being accrued for a given taxlot, the accrual has no regard for the

AMORT/ACCRET METHOD (if any) defined on the Account Definition (AAAD) screen. If accretion to effective maturity date is elected at the security definition level, OID bond acquisitions prior to effective maturity date will be accreted to that date; acquisitions on or after effective maturity date will be accreted to (actual) maturity date. Accretion to effective maturity date with a redemption value NOT equal to 100.0000 causes a RETURN TO NORMAL PROCESSING. The AMORT/ACCRET TO EFF MATY DATE field value (as seen on the BOSB Screen) determines whether or not EFFECTIVE MATURITY DATE is acknowledged by the available OID processing options, where the default value of “N” or the optional value of “P” indicates not to acknowledge, “Y” indicates to acknowledge.

14. Where a PAYDWA or PPAYDA transaction is processed for an account/security qualifying for

OID processing, the resulting amort sold amount is calculated by simply subtracting cost from proceeds.

15. A cost-to-RIP YTM or subsequent price given yield calculation for an OID bond having

accrual method “B”, “C”, “T” or “N” is not possible with the yield formulas available for scientific amortization, since these formulas assume a redemption value of 100.00 per 100 par. Instead, cost-to-RIP calculation is performed by calculating cost-to-par and RIP-to-par, and assuming the difference between the two results represents cost-to-RIP.

16. Multi-currency securities are not eligible for OID processing. 17. Boundary processing (that is, AAAD BOUNDARIES “1”) is required for accounts selecting OID to

call/put (that is, AAAD OID options “3” and “4”). 18. Within OID processing, market discount is assumed to be fully accrued upon the first event

selected to accrue to from purchase date (whether the event is a call, a put, effective maturity date or actual maturity date).

19. Within OID processing, calls/puts are disregarded entirely for bonds having accrual methods

“B”, “C”, “T” and “N”. 20. For more graphic representations of amortization/accretion decision-making processes

(including OID), see Conversion, Reports and Amortization/Accretion Decision Charts, following this section.

21. Securities qualifying for manual input of amort/accret are not eligible for OID processing as

stated in this section. 22. MOD YTM (modified YTM) indicates the assumption to be taken in calculating yields and prices

on market discount of OID acquisitions of coupon bonds in the context of an account electing OID processing for the purpose of accruing and/or taking such discount as amortization at point of sale when the desired method of amortization is yield-based (that is, scientific or level-yield, per the security definition). Amortization/accretion results for all other acquisitions are unaffected by the MOD YTM option elected for a given account. It should be noted that overlaying the interest rate displayed on the CALC screen to simulate the calculation of market discount where modified YTM is being employed is not supported for stepped coupon (asset group “SB” and “SM”) bonds. This is because the interest rate in effect at the request date is automatically populated on the CALC screen for stepped coupon bonds. However, modified YTM can in fact be employed for these bonds.



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23. A bond is considered a “unitized” bond when the Unit Factor field is a value other than 1.0000. Yield calculations include the “Unit Factor” in the interest portion of the calculations when determining the future cash flows. This impacts both level yield and scientific yield calculations.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION TAX LOT LEVEL OID PROCESSING


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7 TAXLOT LEVEL OID PROCESSING

OVERVIEW The Taxlot Issue Price overrides the Security Issue Price to write up the book value of a bond purchased with an Original Issue Discount (OID). Prior to this enhancement, the security master file alone contained the issue price of a bond. Accounts that acquire taxlots and are eligible for OID processing use the issue price of the bond. However, an institutional buyer eligible for a discount below the Security Issue Price can now use the Taxlot Issue Price as the basis from which to accrete OID. The entire discount below the Security Issue Price is taken as OID rather than Market Discount. This taxlot level processing also requires that taxlots be maintained for the security to which a Taxlot Issue Price is assigned. Like OID account level processing, global securities are exempt from this taxlot level OID processing. Taxlot Issue Price OID is accreted based on the following assumptions: • OID processing must be in effect. Previously described are the conditions that must be met for

OID processing to be in effect. If OID processing is not in effect, the difference between the Cost of the taxlot and the Redemption Value will be accreted entirely as Market Discount. Accretion accrued or taken at point of sale is based on the existing account, security, and taxlot criteria. Without OID processing, the system entirely ignores the Taxlot Issue Price.

• An Issue Price must be assigned to the taxlot. This occurs when the transaction is entered into the system. This Taxlot Issue Price then serves as an override to the Security Issue Price. When the security issue date is equal to the taxlot contractual settlement date and the cost of the taxlot is equal to the issue price there is no market discount to accrete. This is due to the fact that the Taxlot Issue Price is equal to the unit price of the taxlot. The entire discount is taken as OID.

• When the issue date is less than the contractual settlement date of the taxlot and OID processing applies, there may be some market discount to accrete dependent on account and security level characteristics. The Taxlot Issue Price will replace the Security Issue Price for purposes of computing a Revised Issue Price (RIP).

Two or more taxlots of a security held in the same account could be using different Issue Prices. This is a legitimate use of taxlot level OID processing as long as the taxlots are:

1. Purchased by an eligible account and have an Issue Price assigned to them, and 2. The security meets all other requirements for OID processing.



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INVOCATION OF THE TAXLOT LEVEL PROCESSING The user enters the Taxlot Issue Price through the transaction entry screen DETE, Transaction Messaging, Online Capture or Batch Capture processes. The Taxlot Issue Price overrides the Security Issue Price when calculating accretion accrued or taken at point of sale. In the presence of a Taxlot Issue Price, Investment Accounting (InvestOne) uses it to compute OID discount, yields, Revised Issue Price (RIP), or any other intermediate value needed for OID or Market Discount accretion. For example, if the issue date of the security is less than the contractual settlement date of the taxlot, the RIP is calculated using the YTM based on the issue date and the Taxlot Issue Price.

“SHUTTING DOWN” TAXLOT LEVEL OID PROCESSING Database changes can cause the taxlot level OID Issue Price processing to terminate. One example is a case where an OID discount is being accreted and the OID flag on the account is subsequently turned off. The OID accretion on the first open valuation date as of the date of the change is backed out and recomputed, based on the existing account, security and taxlot criteria. There is nothing to prevent this type of processing. In this context, it is important to note that account level changes do not trigger an account level sweep. Therefore, the first valuation date that is impacted by changes such as this OID account flag change is the earliest “FROM” date of an account level sweep (AAIN) executed after the change is made. Another example of this is if, in an OID account, the security record were:

1. Changed for a security that was initially set up with a Security Issue Price and 2. The security had at least one buy-like transaction with a Taxlot Issue Price.

Later the account verification date was moved forward, and as a result, the contractual settlement date of the acquiring transaction fell in a closed valuation period. Then if the user “blanks out” the security level issue price on the BOSB screen, any remaining OID for that taxlot is not accrued. This is because OID processing has been deactivated, because the security level issue price is 0.00. Report requests for the closed valuation periods report any OID accrued, but reports run subsequent to the account verification date do not reflect any remaining OID accrual. Only Market Discount accretion is accrued or taken at point of sale at this point. Similarly, any subsequent acquisitions with a Taxlot Issue Price do not accrue OID.

IMPACT OF TAXLOT LEVEL COST OR DATE ADJUSTMENTS Taxlot cost or date adjustments made on taxlots being processed under taxlot level OID processing have the same accounting impact as if the Taxlot Issue Price were the Security Issue Price. In other words, these adjustments have no processing considerations based exclusively on the taxlot having an Issue Price.



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PROHIBITIVE CONDITIONS OID processing continues to be governed by the existing criteria. For a qualifying taxlot, a Taxlot Issue Price greater than 0 but less than 100 is used as a substitute for the Security Issue Price. For a non-qualifying taxlot, the Taxlot Issue Price has no accounting impact. The system thus prohibits the use of the Taxlot Issue Price under certain conditions as follows:

Security Issue Price - BOSB

Taxlot Issue Price - DETE OID Accretion Processing Result

0 0 No OID processing since there is no Security or Taxlot Issue Price.

0 90 No OID processing since there is no Security Issue Price to override.

0 105 The transaction entry screen (DETE) prohibits this condition (Taxlot Issue Price > 100).

80 0 OID processing using the Security Issue Price.

80 70 OID processing using the Taxlot Issue Price to override the Security Issue Price.

80 90 OID processing using the Taxlot Issue Price to override the Security Issue Price.


102 0 No OID processing since the Security Issue Price is greater than 100.

102 90 No OID processing since Security Issue Price is greater than 100.


SETTLEMENT DATE RELATIONSHIP TO LOCALIZED OID PROCESSING Although the intended use of this processing assumes that the contractual settlement date of the taxlot is equal to the issue date of the security, it is not required. Therefore, regardless of the relationship between the security's issue date and the transaction's contractual settlement date, the Taxlot Issue Price may be used. A transaction with a contractual settlement date greater than the issue date of the security impacts the computation of the Revised Issue Price. This impacts the rate of amortization accrued or taken at point of sale for all yield based formulas. The following illustrates the OID processing invoked assuming a valid Security and Taxlot Issue Price are present:

Security Issue Date - BOSB

Contractual Settlement - DETE OID Accretion Processing Result

06/15/97 05/15/97 No OID processing since the contractual settlement less than the Security's Issue date.

06/15/97 06/15/97 OID processing using the Taxlot Issue Price override (assuming cost is equal to the taxlot Issue Price (RIP). All accretion is considered OID.

06/15/97 07/15/97 OID processing using the Taxlot Issue Price override. This condition can lead to a market discount component to the total accretion due to a difference in the taxlot's cost and RIP.



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COST VERSUS TAXLOT LEVEL ISSUE PRICE The OID processing that is invoked is dependent on many factors. However, the expected result between the cost of the taxlot in relationship to its issue price needs to be described. The following describes the OID processing results under four possible conditions. These conditions can occur regardless of whether or not the contractual settlement and security issue dates are equal.

Issue Date = Contractual

Settlement Date

Taxlot Cost = Taxlot Issue

Price OID Accretion Processing Result

Y Y OID processing, all discount will be accreted as OID discount.

Y N OID processing, some discount may be considered Market discount.

N Y OID processing, some discount may be considered Market discount.

N N OID processing, some discount may be considered Market discount.

REPORTING EXCLUSIONS Reports that are specifically excluded from the scope of this taxlot level OID processing follow: Report Exclusion Detail PARMSY SEC Advertising Yield Security Income Detail. This report has its own OID

logic. The changes made to Investment Accounting (InvestOne)'s cost routine for taxlot level OID processing are not reflected in the SEC Advertising Yield request.

SPECTRA New fields breaking out taxlot level OID versus Market Discount accretion of taxlot level OID processing have not been added.

Standard Extract No new fields have been added. Global Client Reporting (GCR)

New reports are not associated with this processing. GCR reports amortization / accretion at the holdings level and does not distinguish between OID and Market Discount.

Investment Accounting (InvestOne) Data Warehouse (EDW)

New fields have not been added to the transaction or holdings tables for this processing.

NOTE: New modifications have not been made to any reports that break out OID and Market Discount at the taxlot level.

Three files were converted for this OID taxlot level processing: the pending transaction (“T2”), transaction (“TS”) and taxlot (“TL”) files.



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TAXLOT LEVEL OID PROCESSING EXAMPLE This simplified example illustrates how the taxlot level OID processing works. The position accrual date evaluated is comprised entirely of one buy transaction. Account Characteristics

Amortization / Accretion: 6 Amort to Call: 1 OID: 3 Mod YTM: 0 Security Characteristics

Security Short Name: COMBO11 Issue Date: 12/31/2002 First Coupon Date: 01/15/2003 First Call Date: 12/31/2017 Call Price: 100.00 Maturity Date: 12/31/2022 Security Issue Price: 75.00 Accretion Method: Scientific Interest Rate: 8.5 % Purchase Characteristics

Contractual Settlement Date: 01/15/2003 Shares / Par: 1,000,000 Cost: 650,000 Taxlot Issue Price: 70.00 Evaluate the OID and Market Discount accruals as of 1/15/2003. This represents one full day of accrual.



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Step 1 of 6: Compute the Issue Price/Issue Date Yield to Call Date.

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: COMBO11 COMBO 11 DATE: 12 31 2002 COMPUTE PRICE, OR YIELD: Y TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... M ISSUE DATE...... 12 31 02 MATU/CALL DATE.. 12 31 2017 FIRST COUP DATE. 01 15 03 PAYMENT MM/DD... 01 15 INTEREST RATE... 8.50000000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 700,000.00 PRICE........... 70.0000000 YIELD........... 13.0669181 INDEX RATIO.... REFERENCE INDEX. PURCHASED INT... 121.87- PURCHASE DATE... 00 00 00

The Yield to Maturity is 13.0669181 based on the Taxlot Issue Price of 70.00. Step 2 of 6: Compute Revised Issue Price (RIP) using the contractual settlement date of the BUY transaction.

The RIP is 70.0513289. NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: COMBO11 COMBO 11 DATE: 01 15 2003 COMPUTE PRICE, OR YIELD: P TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... M ISSUE DATE...... 12 31 02 MATU/CALL DATE.. 12 31 2017 FIRST COUP DATE. 01 15 03 PAYMENT MM/DD... 01 15 INTEREST RATE... 8.50000000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 700,513.29 PRICE........... 70.0513289 YIELD........... 13.0669181 INDEX RATIO.... REFERENCE INDEX. PURCHASED INT... 3,427.42 PURCHASE DATE... 00 00 00 THE ABOVE IS A COUPON PAYMENT



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Step 3 of 6: Compute Cost Yield to RIP. Substitute the Maturity / Call Value with the RIP.

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: COMBO11 COMBO 11 DATE: 01 15 2003 COMPUTE PRICE, OR YIELD: Y TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... M ISSUE DATE...... 12 31 02 MATU/CALL DATE.. 12 31 2017 FIRST COUP DATE. 01 15 03 PAYMENT MM/DD... 01 15 INTEREST RATE... 8.50000000 MATU/CALL VALUE. 70.0513289 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 650,000.00 PRICE........... 65.0000000 YIELD........... 13.2436750 INDEX RATIO.... REFERENCE INDEX. PURCHASED INT... 3,427.42 PURCHASE DATE... 00 00 00 THE ABOVE IS A COUPON PAYMENT

Step 4 of 6: Compute Cost to RIP portion of accretion accrued. Position date being evaluated plus 1 day is entered on the CALC screen.

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: COMBO11 COMBO 11 DATE: 01 16 2003 COMPUTE PRICE, OR YIELD: P TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... M ISSUE DATE...... 12 31 02 MATU/CALL DATE.. 12 31 2017 FIRST COUP DATE. 01 15 03 PAYMENT MM/DD... 01 15 INTEREST RATE... 8.50000000 MATU/CALL VALUE. 70.0513289 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 650,001.69 PRICE........... 65.0001685 YIELD........... 13.2436750 INDEX RATIO.... REFERENCE INDEX. PURCHASED INT... 228.49 PURCHASE DATE... 00 00 00 THE ABOVE IS A COUPON PAYMENT

The difference between remaining cost on the taxlot 650,000 and RIP cost of 650,001.69 represents the total market discount accretion of this taxlot of 1.69.



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Step 5 of 6: Using the position date plus 1 to compute the price given yield on the remaining par that needs to be accrued.

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: COMBO11 COMBO 11 DATE: 01 16 2003 COMPUTE PRICE, OR YIELD: P TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... M ISSUE DATE...... 12 31 02 MATU/CALL DATE.. 12 31 2017 FIRST COUP DATE. 01 15 03 PAYMENT MM/DD... 01 15 INTEREST RATE... 8.50000000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 700,529.57 PRICE........... 70.0529570 YIELD........... 13.0669181 INDEX RATIO.... REFERENCE INDEX. PURCHASED INT... 228.49 PURCHASE DATE... 00 00 00 THE ABOVE IS A COUPON PAYMENT

Step 6 of 6: Compute RIP per remaining Par.

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: COMBO11 COMBO 11 DATE: 01 15 2003 COMPUTE PRICE, OR YIELD: P TO MATURITY OR CALL: C ACCRUAL METHOD.. A PAYMENT FREQ.... M ISSUE DATE...... 12 31 02 MATU/CALL DATE.. 12 31 2017 FIRST COUP DATE. 01 15 03 PAYMENT MM/DD... 01 15 INTEREST RATE... 8.50000000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 1,000,000.00 DOLLAR VALUE.... 700,513.29 PRICE........... 70.0513289 YIELD........... 13.0669181 INDEX RATIO.... REFERENCE INDEX. PURCHASED INT... 3,427.42 PURCHASE DATE... 00 00 00 THE ABOVE IS A COUPON PAYMENT

The difference between the RIP stated in terms of par in Step 5 above of 700,529.57 and RIP per remaining par in Step 6 of 700,513.29 is equal to the OID accretion accrual balance on 1/15/2003. This can be seen on the VSTA2 screen. The difference between the accretion accrual balance as seen on VSTA and VSTA2 reflects the market discount accretion accrual balance on 1/15/2003. This is the result obtained in Step 4 above in the amount of 1.69.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION MARKET DISCOUNT AT POINT OF SALE


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8 MARKET DISCOUNT AT POINT OF SALE Discounted bond purchases for which the account elected not to accrue the market discount can be optionally processed such that at point of sale, the amount of discount which would have accrued is taken as accretion. This optional processing (herein referred to as POINT OF SALE processing) is selected at the account level in the POINT OF SALE field as seen on the Account Definition (AAAD) screen. Valid values for this field are as follows:

N No POINT OF SALE processing. Y For qualified bonds purchased at a market discount where the discount had not been

accrued as accretion, do POINT OF SALE processing without regard to the AMORT TO CALL option selected.

C For qualified bonds purchased at a market discount where the discount had not been accrued as accretion, do POINT OF SALE processing with regard to the AMORT TO CALL option selected: “1”, “4”, “5”, “B”, “E”, “F”, “H”, “K”, or “L”.

When POINT OF SALE processing is selected, only bonds qualifying for accretion and purchased at a discount to redemption value are subject to Point of Sale analysis. This includes Effective Maturity Price for ‘unitized bonds’ and non – ‘unitized’ bonds that have an Effective Maturity Price greater than 200.0000. A given bond's amort/accret qualification is defined on the BOSB Screen in the AMORTIZATION/ACCRETION field. These are the values for this field as interpreted by the POINT OF SALE process:

Y This security qualifies for straight- line accretion at point of sale. S This security qualifies for scientific accretion at point of sale. L This security qualifies for level- yield accretion at point of sale. C This security qualifies for catch- up accretion at point of sale. I This security qualifies for installment (NPV) accretion at point of sale. M & N This security does not qualify for accretion at point of sale.

Where an account has elected POINT OF SALE processing, only qualifying taxable bonds or bonds with taxlot trade date greater than 4/30/93, whose discounted purchases were exempt from accretion within that account are subject to POINT OF SALE analysis. For purposes of POINT OF SALE processing, taxable bonds are those having FEDERAL TAX STATUS = T (on the Security Definition (BOBD) screen). For non-OID bonds and for any bonds held in an account NOT electing OID processing, the values selected in the AMORT/ACCRET METHOD and ACCR METH NOT TO AMORT fields determine which purchases are exempt from accretion within that account. See Account Definition described previously for details on these two fields.



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For OID bonds purchased at a discount into an account electing OID processing option “1” (accrete OID and market discount to maturity) or “3” (accrete OID and market discount to call/put), the market discount is accrued in the account as accretion and is not subject to POINT OF SALE analysis. For the same bonds purchased at a discount into an account electing OID processing option “2” (accrete OID to maturity; do not accrete market discount) or “4” (accrete OID to call/put; do not accrete market discount), market discount is not accrued, and is subject to POINT OF SALE analysis. See OID (Original Issue Discount) Processing, in this section, for further details regarding the available OID processing options. Taxlots established by purchases subject to POINT OF SALE analysis will be analyzed at point of sale (or other disposition or redemption) to determine the amount of discount which can be taken as amortization sold. The analysis is sensitive to the method of accretion (that is, straight-line, installment (NPV), scientific, level-yield or catch-up) defined to the security, and furthermore for straight-line accretion, the AMORTIZATION OPTION selected on the Account Definition (AAAD) screen, whose valid values for purposes of POINT OF SALE processing are:

Blank

Calculate POINT OF SALE market discount assuming accrual would have begun on the day after trade date of purchase and that full accrual would have been scheduled to occur on the maturity date.

1

Calculate POINT OF SALE market discount assuming accrual would have begun on the trade date of purchase and that full accrual would have been scheduled to occur on the day prior to maturity date.

2

Calculate POINT OF SALE market discount assuming accrual would have begun on the contractual settle date of purchase and that full accrual would have been scheduled to occur on the day prior to maturity date.

For accounts electing POINT OF SALE “C” the analysis is also sensitive to the AMORT TO CALL option selected on the Account Definition (AAAD) screen. Valid values for purposes of POINT OF SALE processing are: 1 Accrete to next chronological call or put date and value. 4 or 5 Accrete to the best yielding put date and value if only puts are scheduled between

purchase and maturity (or effective maturity); otherwise, accrete to the call/put date and value providing the worst yield.

B Amortize and/or accrete to next chronological call or put date and value; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value).

E Amortize to next chronological call or put date and value; accrete to call or put date and value providing the worst yield or accrete to put date and value providing the best yield if only puts; otherwise amortize/accrete to effective maturity date and value (unless effective maturity date has been reached/passed in which case continue amortization/accretion to stated maturity date and value).

F




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H


K


L


POINT OF SALE processing with regard to calls/puts requires boundary processing (BOUNDARIES = 1 on AAAD). Boundary processing limits the available calls/puts to be selected to those values between original or adjusted cost and par inclusive (see Boundary Processing for further details). For qualifying dispositions, an initial POINT OF SALE calculation is performed to determine the actual amount of market discount which would have accrued on the taxlot(s) involved according to the security's AMORTIZATION/ACCRETION method, the account's AMORT TO CALL option, if applicable, (and for straight-line, the account's AMORTIZATION OPTION). For an OID purchase in an account electing OID processing option “2” or “4”, further analysis is done to separate OID and market discount. If the OID purchase is that of a fixed income coupon bond for which a yield-based method of amortization/accretion (either scientific or level-yield) has been elected, the calculation of the market discount component of the total discount which would have been accrued is further sensitive to the MOD YTM option elected for the account. See OID (Original Issue Discount) Processing, in this section, for further details regarding MOD YTM options. A final analysis assures that POINT OF SALE market discount amort sold is allowed only to the extent of gain. Here are two examples that illustrate the potential results of these analyses: Example 1 A taxable OID bond is purchased at a discount into an account electing AMORT/ ACCRET METHOD “0” (no amort/accret), electing OID processing option “0” (no OID processing) and electing POINT OF SALE “Y” (do POINT OF SALE processing ignoring calls/puts). A sale transaction is entered and an initial POINT OF SALE analysis results in the following amounts:

par relieved: 1,000,000.0000

cost relieved: 981,000.00

potential market

discount amort sold: 200.00

potential book relieved: 981,200.00



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A subsequent analysis assures that POINT OF SALE market discount amort sold is allowed only to the extent that the amount does not cause or contribute to a realized loss. Results could vary depending on the proceeds amount on the sale. For example, if proceeds were 981,270.00, then no loss would occur or be contributed to as a result of taking the entire 200.00 amount at point of sale; therefore, the amount initially calculated would simply be used as amort sold on the sale. However, if proceeds were 981,150.00, a -50.00 realized loss would result from taking the entire 200.00 amount at point of sale; therefore, the amount initially calculated would be adjusted (from 200.00 to 150.00) to prevent POINT OF SALE from creating or contributing to a realized loss:

realized gain (loss) based on initially calculated amort sold: 981,150.00 - (981,000.00 + 200.00) = -50.00 realized gain (loss) based on adjusted amort sold: 981,150.00 - (981,000.00 + 150.00) = 0.00

Example 2 The same OID bond purchase used in Example 1 is used here, only here the account elects OID processing option 2 (accrete OID to maturity; do not accrete market discount). A sale transaction is entered and an initial POINT OF SALE analysis results in these amounts:

par relieved: 1,000,000.0000

cost relieved: 981,000.00

OID amort sold: 125.00

potential market

discount amort sold: 70.00

potential book relieved: 981,195.00 The subsequent analysis performed to assure that POINT OF SALE market discount amort sold is allowed only to the extent of gain could cause the end results to vary, depending on the proceeds amount on the sale. For example, if proceeds are 981,270.00, then no loss occurs or is contributed to as a result of taking the entire 70.00 amount at point of sale. Therefore, the entire amount initially calculated is simply included in amort sold on the sale. However, if proceeds are 981,150.00, a -45.00 realized loss results from taking the entire 70.00 amount at point of sale. Then, the amount initially calculated is adjusted (from 70.00 to 25.00) to prevent POINT OF SALE from creating or contributing to a realized loss:

realized gain (loss) based on initially calculated amort sold: 981,150.00 - (981,000.00 + 125.00 + 70.00) = -45.00 realized gain (loss) based on adjusted amort sold: 981,150.00 - (981,000.00 + 125.00 + 25.00) = 0.00

If proceeds are 981,110.00, a -85.00 realized loss results from taking the 70.00 amount at point of sale. Then, the amount initially calculated is adjusted (from 70.00 to 0.00) to prevent POINT OF SALE from creating or contributing to a realized loss:

realized gain (loss) based on initially calculated amort sold: 981,110.00 - (981,000.00 + 125.00 + 70.00) = -85.00 realized gain (loss) based on adjusted amort sold: 981,110.00 - (981,000.00 + 125.00 + 0.00 ) = -15.00



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Purchases NOT qualifying for POINT OF SALE processing (for example, a purchase at a premium to par) result in a RETURN TO NORMAL PROCESSING, meaning amort/accret results are as though the account had not elected POINT OF SALE processing. See the POINT OF SALE Flowchart for more information regarding RETURN TO NORMAL PROCESSING conditions.



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8.1 MARKET DISCOUNT AT POINT OF SALE: SPECIAL CONDITIONS Point of Sale Processing and OID Processing function in conjunction with several rules and conditions. After the constraints listed below, several of these common conditions are covered in more detail. These include:

• OID Bonds in Accounts Electing OID Processing without Market Discount. • Non-OID Bonds. • Point of Sale “Y” or “C” Option. • Taxlot Adjustment Transactions and Point of Sale Processing. • Accretion to Effective Maturity Date. • Modified YTM.

CONSTRAINTS ON POINT OF SALE PROCESSING • Securities qualifying for manual input of amort/accret are not eligible for point of sale

processing.

• All POINT OF SALE processing is dependent on the bond qualifying for amort/accret (that is, BOSB AMORT/ACCRET must be “Y”, “S”, “L”, “C”, or “I”. If BOSB AMORT/ ACCRET = N, RETURN TO NORMAL PROCESSING, which in this case means no POINT OF SALE processing, the discount ends up as realized gain at point of sale).

• Where a PAYDWA, PPAYDA, MBSPDA, MBSPPA or REPAY transaction qualifies for POINT OF SALE processing, the resulting amort sold amount is calculated by simply subtracting cost from proceeds.

• Where POINT OF SALE amort sold is calculated on a sale pending contractual settlement where the method of accretion assumed in calculating the amount is contractual settle date based, an adjustment is made to defer the impact of amort sold on earned amortization until contractual settle date of the sale. The adjustment is reflected in the taxlot's accrual balance, even though the discount had not actually been accrued. The adjustment prevents the POINT OF SALE amort sold amount from being “earned” prematurely.

• POINT OF SALE processing applies only to taxlot accounts and only to holdings for which taxlots are maintained. POINT OF SALE processing is prevented for average cost accounts. Holdings for securities priced at face (that is, no taxlots) will be processed without any special POINT OF SALE considerations (that is, RETURN TO NORMAL PROCESSING).

For ANY account: • Any discount amount accrued as amortization is also taken as amort sold at point of sale. • Any discount amount accrued as income is expected to be taken as income sold at point of

sale, or as income collected upon redemption without regard for the POINT OF SALE option. The POINT OF SALE option only influences potential amort sold calculations where, at the point in time of the sale: • Amortization/accretion is NOT being accrued on the taxlot, • The remaining cost to par relationship is representative of a discount, • The bond's FEDERAL TAX STATUS (as seen on the BOBD - Security Definition screen) is “T” or

the taxlot trade date is greater than 4/30/93, • The ISSUE DATE (if explicitly entered, as seen on the BOSB - Security Definition - Bond screen is

greater than 7/18/84 if the taxlot trade date is on or before 4/30/93, and • A TXLAA (amortization/accretion) Taxlot Adjustment transaction is NOT in effect.



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CONSTRAINTS ON OID PROCESSING • Within OID processing, market discount is assumed to be fully accrued upon the first event

selected to accrue OID to from purchase date (whether the event is a call, a put, effective maturity date or actual maturity date).

• Within OID processing, calls/puts are disregarded entirely for bonds having accrual methods “B”, “C”, “T” and “N” (for purposes of accruing OID and for purposes of accruing and/or taking market discount as accretion at point of sale).

• For an account electing OID processing and/or POINT OF SALE processing, discounts on bonds having accrual methods of “B”, “C”, “T”, and “N” are NEVER accrued or collected as income (even in a RETURN TO NORMAL PROCESSING condition). See Conversion, Reports and Amortization/Accretion Decision Charts for special considerations regarding bond accrual methods “B”, “C”, “T”, and “N”.

OID BONDS IN ACCOUNTS ELECTING OID PROCESSING WITHOUT MARKET DISCOUNT If POINT OF SALE processing IS Elected: The would-be market discount accrued at point of sale is taken as amort sold (and, therefore, as amort earned) at point of sale - but only to the extent of a gain on such discount: • Calculated on a basis dependent on the bond AMORT/ACCRET qualification (that is, straight-line,

scientific, level-yield or none), • Where a straight-line result is based on “T”, “T+1” or “CS”, as selected at the account level. When the calculations are being performed for a coupon bond, a scientific or level-yield result also depends on the MOD YTM option elected for the account. If POINT OF SALE “C” is selected, then the amort sold calculation is also sensitive to the AMORT TO CALL option on AAAD. Whereas the accrual of market discount on an OID does NOT consider the ISSUE DATE relative to 07/18/84, the POINT OF SALE calculation of un-accrued discount does if the taxlot trade date is on or before 4/30/93. If POINT OF SALE processing IS NOT Elected: The would-be market discount accrued at point of sale is taken as realized gain at point of sale. For a non-OID bond in ANY account, market discount not having been accrued as either amortization or as income is taken as realized gain at point of sale, unless POINT OF SALE processing is selected at the account level. In that case the would-be market discount accrued at point of sale is taken as amort sold (and, therefore, as amort earned) at point of sale (but only to the extent of a gain on such discount).

NON-OID BONDS For a non-OID bond in ANY account, market discount not having been accrued as either amortization or as income will be taken as realized gain at point of sale, unless POINT OF SALE processing is selected at the account level, in which case the would-be market discount accrued at point of sale is taken as amort sold (and, therefore, as amort earned) at point of sale (but only to the extent of a gain on such discount), where the method of amortization is determined based on the BOSB AMORT/ACCRET qualification (that is, straight-line, scientific, level-yield, installment (NPV), catch-up or none), and where resulting straight-line amortization is further based on “T”, “T+1” or “CS” (as selected at the account level). If POINT OF SALE “C” is selected, then the amort sold calculation is also sensitive to the AMORT TO CALL option on AAAD. Whereas the accrual of market discount on a non-OID (or on an OID in a non-OID account) does NOT consider the ISSUE DATE relative to 07/18/84, the POINT OF SALE calculation of un-accrued market discount does if the taxlot trade date is on or before 4/30/93. Additionally on such a bond, the accrual of market discount will only consider the bond's FEDERAL TAX STATUS if the AAAD AMORT/ACCRET METHOD is



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“7” or “8”, yet the POINT OF SALE calculation of un-accrued market discount always considers FEDERAL TAX STATUS on bond taxlots that have a trade date on or before 4/30/93. Point of Sale “Y” or “C” Option For an account electing NOT to do OID processing and electing POINT OF SALE “Y”, the difference between cost and par is regarded as market discount, whether or not the bond is an OID. For an account electing NOT to do OID processing and electing POINT OF SALE “C”, the difference between cost and the initial call/put selected per the account's AMORT TO CALL option is regarded as market discount, whether or not the bond is an OID. Such a discount is processed without any OID considerations in terms of whether or not to accrue the discount and, if the discount is to be accrued, through which method the accrual is to be calculated (that is, RETURN TO NORMAL PROCESSING). Any such discount, if un-accrued either as amortization or as income, is realized gain at point of sale, unless the account elects POINT OF SALE processing in which case the would-be market discount accrued at point of sale is taken as amort sold (and, therefore, as amort earned) at point of sale (but only to the extent of gain on such discount), calculated based on the BOSB AMORT/ACCRET qualification (that is, straight-line, scientific, level-yield, installment (NPV), catch-up or none) and where any resulting straight-line calculation is further dependent on the AMORT OPTION (that is, “T”, “T+1” or “CS”) selected at the account level. If POINT OF SALE “C” is selected, then the amort sold calculation is also sensitive to the AMORT TO CALL option on AAAD. Whereas the accrual of market discount on a non-OID (or on an OID in a non-OID account) does NOT consider the ISSUE DATE relative to 07/18/84, the POINT OF SALE calculation of un-accrued market discount does if the taxlot trade date is on or before 4/30/93. Additionally on such a bond, the accrual of market discount considers the bond's FEDERAL TAX STATUS only if the AAAD AMORT/ACCRET METHOD is “7” or “8”, yet the POINT OF SALE calculation of un-accrued market discount always considers FEDERAL TAX STATUS on bond taxlots that have a trade date on or before 4/30/93. ALERT: Boundary processing (that is, AAAD BOUNDARIES “1”) is required for accounts selecting POINT OF SALE “C”.

TAXLOT ADJUSTMENT TRANSACTIONS AND POINT OF SALE PROCESSING As Taxlot Adjustment Transactions potentially influence amortization/accretion, they also potentially influence POINT OF SALE processing. An adjustment to the begin-accrual date on which the POINT OF SALE calculation of amort sold is to be based, or to the amount of original cost remaining in the taxlot, would influence subsequent POINT OF SALE calculations. Taxlot Adjustments may influence a taxlot to such an extent that it is brought in to or out of POINT OF SALE processing. For example, cost may be adjusted from an amount representing a premium to an amount representing a discount to par, thereby changing a non-POINT OF SALE scenario into a potential POINT OF SALE scenario. The TXLAA (Amortization/Accretion) Taxlot Adjustment transaction always causes a RETURN TO NORMAL PROCESSING if used in a POINT OF SALE scenario. See Section 5.200, Taxlot Adjustments for more information on these transactions.

ACCRETION TO EFFECTIVE MATURITY DATE If accretion to effective maturity date is elected at the security definition level, then bond acquisitions prior to effective maturity date have POINT OF SALE calculated assuming that date as maturity. Acquisitions on or after effective maturity date have POINT OF SALE calculated assuming (actual) maturity date. In a POINT OF SALE without regard to calls/puts scenario, accretion to effective maturity date and value NOT equal to 100.00 causes a RETURN TO NORMAL PROCESSING. The AMORT/ACCRET TO EFF MATY DATE field value (as seen on the BOSB Screen) determines if EFFECTIVE MATURITY DATE is acknowledged by the POINT OF SALE processing option:



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• “N” or the optional value of “P” indicates not to acknowledge. Default. • “Y” indicates to acknowledge.

For more graphic representations of amortization/accretion decision-making processes (including POINT OF SALE), see Conversion, Reports and Amortization/Accretion Decision Charts.

MODIFIED YTM MOD YTM (modified YTM) indicates the assumption to be taken in calculating yields and prices on market discount on OID acquisitions of coupon bonds in the context of an account electing OID processing for the purpose of accruing and/or taking such discount as amortization at point of sale when the desired method of amortization is yield-based (that is, scientific or level-yield, per the security definition). Amortization/accretion results for all other acquisitions are unaffected by the MOD YTM option elected for a given account. Note that overlaying the interest rate displayed on the CALC screen to simulate the calculation of market discount where modified YTM is being employed is not supported for stepped coupon (asset group “SB” and “SM”) bonds. This is because the interest rate in effect at the request date is automatically populated on the CALC screen for stepped coupon bonds. However, modified YTM may be employed for these bonds.

8.2 EXAMPLE: AMORTIZATION TYPE ON VSTA FOR POINT OF SALE SCENARIO Account elects for A/A method 1 (Straight Line Amortization (Accrete Premiums, do not amortize Discounts) with Point of Sale Y Below are transactions for a security purchased at a discount, Memo Account Security Tran Code Trade Date Shares/par Principal

1 Standalone POSCORP1 BUY 1/2/2011 10,000,000.00

8,423,440.00

9 Standalone POSCORP1 SELL 1/12/2011 5,000,000.00

4,711,720.00

11 Standalone POSCORP1 SELL 1/15/2011 2,000,000.00

2,827,032.00

VSTA screen for Memo # 1,



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SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION AMORTIZATION TYPE


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9 AMORTIZATION TYPE ON TAXLOT SCREEN: VSTA The VSTA Screen displays accrued amortization/accretion for a requested transaction as of and beyond a specified valuation date. This screen is only valid for positions being maintained on a taxlot basis. The amortization type (AMRT TYP) of Premium or Discount is determined by valuation (for non-manual amortization bonds) or by the Amortization Type designated on TXLMA transactions (for manual amortization bonds) for each tax lot at a valuation period end date based on the relationship between the absolute value from which the book value started and finished for a valuation period. Where the absolute value of the starting book value is higher than the absolute value of the ending book value amortization is classified as Premium for the tax lot. Where the absolute value of the starting book value is lower than the absolute value of the ending book value, amortization is classified as Discount for the tax lot. InvestOne takes into account call/put prices and dates, best/worst scenarios, boundary processing, effective maturity date and price, de minimus processing and exceptional conditions (tax lot adjustments). The amortization type is stored on the tax lot record and applies to all components of amortization (accrued, sold and earned). Field Name Valid values Description

AMRT TYP P-Premium

D-Discount

N-No Amortization/Accretion

Displays amortization type based on from value and to value for a tax lot level

9.1 EXAMPLE: AMORTIZATION TYPE ON VSTA SCREEN In the following examples, a taxlot account (Taxlot Code “F”) is defined as qualifying for scientific, level-yield, straight-line, installment (NPV) and catch-up amortization and accretion (Amort/Accret Method “6”). For those securities on which straight-line amort/accret is to be computed, the accrual of amortization/accretion is to begin on trade date of acquisition + 1 (amort option “BLANK”) and ends on maturity date. Whereas Scientific and Level Yield amortization/accretion is to be computed, the accrual of amortization/accretion is to begin on contractual settled date of acquisition and ends on the day before maturity date Example 1: 100,000 par of ABCLTD, a corporate bond, is purchased at 102.50 with a trade date of 01/02/2011. The security elects for Straight Line Amortization (Memo # 1) BOSB Setup



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VSTA Screen (Memo # 1), Since acquisition cost is 102.50 and redemption price is 100.00 the amortization type of ‘P’ is reflected on VSTA screen from T+1 date (01/03) and ends on 01/25/2011 (maturity date). The Amortization Type is carryforward until a MATU transaction is entered.



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Example 2: 100,000 par of ABCLTD, a corporate bond, is purchased at 99.50 with a trade date of 01/05/2011. The security elects for Straight Line Amortization (Memo # 3) VSTA Screen (Memo # 3), Since acquisition cost is 99.50 and redemption price is 100.00 the amortization type of ‘D’ is reflected on VSTA screen from T+1 date (01/06) and ends on 01/25/2011 (maturity date). The Amortization Type is carryforward until a MATU transaction is entered.



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Example 3:

100,000 par of ABCLTD, a corporate bond, is purchased at 100.00 with a trade date of 01/05/2011. The security elects for Straight Line Amortization (Memo # 5) VSTA Screen (Memo # 5), Since acquisition cost and redemption price are equal the amortization type of ‘N’ is reflected with 0.00 amortization amount on VSTA screen from T+1 date (01/06) and ends on 01/25/2011 (maturity date).



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Example 4: ABCLTD2 is set up to amortize to Effective Maturity Date (Amort to Effective Maturity Date = Y on BOSB), has an Effective Maturity Price of 110.00 and Effective Maturity Date of 01/10/2011.



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100,000 par of ABCLTD2, a corporate bond, is purchased at 105.00 with a trade date of 01/05/2011. The security elects for Straight Line Amortization (Memo # 7) VSTA Screen (Memo # 7), Acquisition cost is 105.00 and redemption cost is 110.00. Since the security is set up to amortize to effective maturity date the amortization type is ‘D’ starting from 01/06/2011 (T+1 date) until 01/10/2011. In this example, the security does not mature on Effective Maturity Date (01/10/2011). The security’s revised “from” cost is 110.00 and redemption cost is now 100.00. Amortization type is reflected as ‘P’ from 01/11/2011 until 01/25/2011 (maturity date).

Example 5: 100,000 par of ABCLTD1, a corporate bond, is purchased at 102.50 on trade date of 01/02/2011 and contractual settle date of 01/05/2011. The security elects Scientific Amortization (Memo # 9). BOSB Setup



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VSTA Screen (Memo # 9), Since acquisition price is 102.50 and redemption price is 100.00 the amortization type of ‘P’ is reflected on VSTA screen from contractual date (01/05) and ends a day before maturity date (01/24/2011). If a maturity transaction is not enterd on maturity date, amortization will be de-earned after maturity date has passed. VSTA will reflect amortization type of ‘N’ with 0.00 amortization amount.



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Example 6: 100,000 par of ABCLTD3, a corporate bond, is purchased at 99.50 with a trade date of 01/02/2011 and contractual settle date of 01/05/2011. The security elects Level Yield Amortization (Memo # 11). BOSB Setup



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VSTA Screen (Memo # 11),

Since acquisition price is 99.50 and redemption price is 100.00 then amortization type of ‘D’ is reflected on VSTA screen from contractual date (01/05) and ends a day before maturity date (01/24/2011).



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If a maturity transaction is not entered on maturity date, amortization will be de-earned after maturity date has passed. VSTA will reflect amortization type of ‘N’ with 0.00 amortization amount.

9.2 AMORTIZATION TYPE ON VARIOUS CALLABLE SCENARIOS

Scenario

Valuation Date

AAAD setup BOSB Setup Amort Type

Comment

On 12/3/2012, a bond is purchased at 90.00.

12/15/2012 Amort to call = 1

Maturity Date = 06/15/2030, Maturity Price = 100.00

Discount The discount is accreted to the maturity date.


1/23/2013 AMORT TO CALL = 0

Maturity Date = 11/10/2028

Discount The discount is accreted to the maturity date.

Maturity Price = 100.00




Premium Premium is amortized to the first call date/price.

Maturity Price = 100.00 Call Date 1 = 6/30/2013 Call Price 1 = 101.00

Call Date 2 = 6/30/2014 Call Price 2 = 100.5

The bond above is not called on 6/30/2013.*



Premium Amortization continues from the first call date/price to the second call date/price.






Discount Since boundary processing applies, the call date/price is ignored as it is outside the boundary of the purchase price and maturity price. The discount is accreted to the maturity date/price.

BOUNDARIES = 1

Maturity Price = 100.00

Call Date 1 = 5/15/2013

Call Price 1 = 110.00

On 12/14/2012, a 12/17/2012 AMORT TO Maturity Date = Discount Discount is accreted to the



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bond is purchased at 95.00.

CALL = 1 5/15/2020 call date/price.


The bond above is not called on 5/15/2013.*



Premium The amortization stream changes from discount to premium. The bond is now amortizing from a price of 110 on 5/15/13 to maturity.



12/16/2012 AMORT TO CALL = 1


None The bond is purchased at a premium to maturity, but the Amort to Call option amortizes the premium to the next call date/price which is the same as the purchase price.



*Note: For accounts or securities that elect straight-line amortization, the date where amortization is recalculated if a bond is not redeemed on a call, put or effective maturity date is determined by the AMORT OPTION field on AAAD.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION INSTALLMENT BONDS AND THE INSTALLMENT (NPV) AMORTIZATION METHOD


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10 INSTALLMENT BONDS AND THE INSTALLMENT (NPV) AMORTIZATION METHOD

This section discusses the processing of Installment Bonds available within Investment Accounting (InvestOne) in general, with a focus on the use of the installment (NPV) method of amortization.

OVERVIEW In the context of Investment Accounting (InvestOne) functionality, an Installment Bond may be generically defined as a fixed income coupon bond for which portions of the debt are scheduled to be retired during its life, and before its stated maturity, based on a prearranged schedule. The interest income characteristics of an Installment Bond are the same as those of other fixed income coupon bonds that use an actual/actual or 30/360 day count basis for calculations of income purchased, sold, accrued and earned, as well as the frequency and calculations of income collections. If premium or discount is not to be amortized, Installment Bonds may be defined and processed within Investment Accounting (InvestOne) much like corporate or municipal fixed income coupon bonds. Additionally, by using a unique asset group a principal repayment schedule may be established, so that principal repayment transactions may be generated (by the optional Transaction Generator module), and so that an accurate effective maturity date may be calculated on a given position for reporting purposes.

NPV More than likely, however, the desire to have market premium or discount on a given purchase of an Installment Bond taken as amortization will result in the need to use the installment (NPV) amortization method. The installment (NPV) method uses a constant yield approach to amortize premium or discount from purchase date and cost, to the values projected at each subsequent cash flow date - based on a schedule of principal repayments and interest payments. The premium or discount associated with a given principal repayment is fully amortized at the date of that scheduled cash flow, and is taken as amortization sold on the disposition of that portion of the taxlot, through the entry (or optional generation) of a principal repayment transaction. The amortized cost value of an Installment Bond is initially synchronized. This results in a constant-yielding net present value calculation at contractual settle date of purchase, and gets re-synchronized with the constant-yielding net present value calculation again at each cash flow date. The one-day acceleration of accrual common to all contractual settle date-based amortization methods is acknowledged in the process. Note that between cash flow dates the amortized cost value changes by a constant daily amount (rather than by an amount which is true to a constant yield), as the total amount to be accrued from each cash flow date to the next is accrued using a straight-line method over the actual days in the period.



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10.1 INSTALLMENT BOND SECURITY DEFINITION ACTIVITIES Installment Bonds are initially defined to Investment Accounting (InvestOne) through the same basic screen progression as that which is used to define any bond-like security:

• Security Definition (BOBD) • Security Definition - Bond (BOSB) • Security Description (BODE) • *Repayment Schedule (BORS) Screen

*If the Installment Bond qualifies for amortization/accretion, or the repayment schedule indicates that payments are due before maturity, the Security Definition process must be completed on the BORS Screen.

10.1.1 CONSIDERATIONS IN THE DEFINITION OF INSTALLMENT BONDS

SECURITY DEFINITION (BOBD) SCREEN Field Requirement PRICE CODE Must be “B” (bond-like: price per 100 of face) or “C” (market value is equal

to amortized cost). ASSET GROUP Must be “IB” (Installment Bonds). 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.

SECURITY DEFINITION - BOND (BOSB) SCREEN Field Requirement ACCRUAL METHOD Must be “A” (coupon bond (actual/actual)) or “D” (coupon bond

(30/360)). ACCR INCM OPT If accrual method is “A” then accr incm opt must be blank. If

accrual method is “D” then accr incm opt must be “0”, “1” or blank. FIRST COUPON and ISSUE DATES

Must be specified if the installment (NPV) method of amortization is desired (else is optional) to identify the issue and first coupon dates of the bond. Whereas issue date may be off-cycle with a standard coupon date based on pymt freq and payment month/day, the first coupon date must be on-cycle with a standard coupon date.

INTEREST RATE Should be entered. MATURITY DATE Must be entered. PYMT FREQ and PAYMENT MONTH/DAY

Must be entered to indicate the standard coupon cycle of the bond issue.

AMORTIZATION/ ACCRETION

Must be “N” (for no amortization/accretion) or “I” (for installment (NPV) method).

ORIGINAL BAL The original (principal) balance of the installment bond should be entered in the original bal field.

EFFECTIVE MATURITY DATE May be optionally entered.



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The rest of the data on the BOSB 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; specifically, general requirements for bonds using accrual methods “A” and “D” as applies to these entries.

SECURITY DESCRIPTION (BODE) SCREEN In defining Installment Bonds, no unique considerations apply to this screen.

REPAYMENT SCHEDULE (BORS) SCREEN If the Installment Bond does not qualify for amortization/accretion and provides for payment of interest and principal only at maturity, the security definition requirements are complete after following the basic screen progression mentioned above. If, however, the Installment Bond qualifies for amortization/accretion, or the repayment schedule indicates that payments are due before maturity, an additional step must be performed. To finish the security definition process, establish the schedule of principal and interest payments specific to the Installment Bond on the Repayment Schedule (BORS) screen. To add or delete a schedule, or change an entry in an existing schedule: 1. Request the BORS screen in its default mode (ADD).

2. Enter the security number (including security date and qualifier, if applicable) in the SECURITY field.

2a. Enter the cash flow date of the entry being added or otherwise maintained in the DATE field. Press ENTER.

The screen returns with the cursor positioned at the first REPAY AMOUNT field, corresponding to the date requested.

3. Up to nine additional cash flow dates display in ascending order, if applicable. Note that when the repayment schedule is initially added, the system automatically determines the cash flow dates based on the first coupon date, payment frequency and maturity date from the security master. Therefore, when adding a schedule, the user should specify a date no greater than the first coupon date in order to have all cash flow dates available for input as to repayment amounts.

BORS supports up to ten principal and interest cash flows per screen for up to forty screens. If the Installment Bond has more than ten cash flow dates, multiple screens are utilized. Each time you press ENTER, the next block of cash flow dates displays. In the ADD or CHANGE mode, the user may manipulate any or all of the REPAY AMOUNT fields being displayed, which are simultaneously updated after pressing ENTER.

• A RECORD CHANGED system response is given, and the difference between the ORIGINAL BALANCE and the sum of the principal repayment amounts entered is additionally displayed while the schedule STATUS is incomplete.

• When the repayment schedule STATUS is complete (that is, when the sum of the repayment amounts entered equals the ORIGINAL BALANCE), a PAYMENT DATA APPLIED system response is given.

Mode Action CHANGE REPAY AMOUNT(S) can be zeroed out through the CHANGE mode.

DELETE For any given cash flow date, purges the entire repayment schedule.

VIEW Displays any interest cash flows based on the security's interest rate, payment frequency, accrual method, and original balance - adjusted by any principal repayments in the schedule.



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BORS Screen: Repayment Schedule NEXT BORS MODE ADD FDMP256 * * * REPAYMENT SCHEDULE * * * SECURITY: DATE: ORIGINAL BALANCE: 0 STATUS:

Field Description. Fields Shaded Gray are Required. SECURITY The identifier (including date and qualifier, if applicable) of the security for

which the repayment schedule is being maintained.

DATE Date from which subsequent cash flow dates will be displayed (that is, start or scroll date). <ENTER>

SECURITY SHORT NAME System displays the 25-character security short name from the security master (BOBD).

ORIGINAL BALANCE System displays the original balance from the security master (BOSB).

STATUS System display that indicates whether the repayment schedule is complete or incomplete. In order for the schedule to be complete, the sum of the repayment amounts entered must equal the original balance. Amortization/accretion on an Installment Bond are not calculated when the repayment schedule STATUS is incomplete.

CASH FLOW DATE The date of the cash flow. Cash flow dates are determined automatically based on the first coupon date, payment frequency and maturity date from the security master (BOSB). For a given repayment schedule, all cash flow dates are determined by the system when the schedule is added. Repay amounts can then be added, changed or zeroed out, but cash flow dates may not be added or deleted without deleting and re-adding the entire schedule.

REPAY AMOUNT The repayment amount (relative to the original balance) to be applied to the remaining original balance on the cash flow date. <ENTER>

INTEREST AMOUNT Display values that are computed by the system from the security data once the repayment schedule is complete.

EFF MATURITY The average life date as of the cash flow date. These display values are computed by the system once the repayment schedule is complete.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION INSTALLMENT BOND PROCESSING


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11 INSTALLMENT BOND PROCESSING This explanation and example illustrate the processing of Installment Bonds within the context of Investment Accounting (InvestOne). It is assumed that the reader has a working knowledge of the Investment Accounting (InvestOne) system in a more general context. The characteristics of a given Installment Bond are determined based on the previously described security definition characteristics. The characteristics of a given position of an Installment Bond are determined based on account and security definition characteristics as well as the transaction activities affecting the position. Account definition characteristics influence an Installment Bond position in much the same way that they would influence a position in any other fixed income coupon bond. The significant difference is this: while the determination of whether or not to maintain taxlots is generally dependent (in part) on account definition characteristics, taxlots are always maintained for Installment Bond positions, regardless of what the account characteristics might otherwise imply. The “IB” Asset Group designation on the security definition of an Installment Bond forces taxlots to be maintained on positions in these bonds. Security definition characteristics also influence an Installment Bond position in much the same way that they would influence a position in any other fixed income coupon bond. One difference, however, is that additional security definition data, that is definable for Installment Bonds on the BORS screen described above, results in the ability to generate principal repayment transactions through the optional Transaction/GNMA Generator module. It also results in the ability to obtain an accurate effective maturity date over the life of the position for reporting purposes. See Section 5.220, Transaction/GNMA Generator for further details on that application option and Section 5.20, Security Definition Activities for further details on effective maturity date functionality. The most significant way in which security definition characteristics influence an Installment Bond position in a way that is unique to these types of bonds is that the repayment schedule data (if “complete”) allows for the installment (NPV) method of amortization to be invoked. The basic set of transaction codes used to process fixed income bond positions in general are also supported for the processing of Installment Bond positions; with the addition of the REPAY (Installment Bond Principal Repayment) transaction code required for these bonds. The following sections provide further details on Installment Bond Processing. They are followed by a list of constraints on this functionality, and example in which the Installment (NPV) Amortization Method applies. These sections are:

• Security Definition Characteristics and defining the Repayment Schedule. • Tran Codes for Installment Bond Processing. • “PAYMENT DATA APPLIED” Message on BORS. • Taxlots and Installment Bond Processing. • NPV Straight-Line Method of Amortization vs. General Straight-Line Method.

SECURITY DEFINITION CHARACTERISTICS AND DEFINING THE REPAYMENT SCHEDULE The security definition characteristics of an Installment Bond as defined in the BOBD and BOSB screens must be complete and correct before defining the repayment schedule data in the BORS screen. This requirement exists to clarify the fact that the Repayment Schedule and related amortization results are dependent on these security definition characteristics for the entire life of the bond issue.



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Once a Repayment Schedule is added for a given Installment Bond it must be deleted before changes to any of the following security definition characteristics are allowed:

ACCRUAL METHOD PYMT FREQ

FIRST COUPON DATE PAYMENT MONTH/DATE

ISSUE DATE MATURITY DATE

INTEREST RATE ORIGINAL BAL If account and/or security definition characteristics indicate that no amortization of premium and/or accretion of discount is to be taken for the purchase of a given Installment Bond, it may still be desirable to define the Repayment Schedule, as this data is used not only for amortization/accretion purposes but also for the purpose of generating Principal Repayment (REPAY) transactions through the Transaction/GNMA Generator application option, and for calculating effective maturity date for Installment Bond positions. See Sections 5.20 and 5.220, respectively, for further details on these features of Investment Accounting (InvestOne). Account and security definition characteristics indicating whether or not amortization/accretion is to be earned are documented previously in this Section.

TRAN CODES FOR INSTALLMENT BOND PROCESSING These are the valid transaction codes used for the processing of Installment Bonds:

Tran Code Transaction Description BUY Purchase

RBUY Reversal of a Purchase

RBBUY Purchase Rebook

SELL Sale

RSELL Reversal of a Sale

RBSELL Sale Rebook

FDEL Free Delivery

FREC Free Receipt

INT Interest Collected

INT + Interest Adjustment - Increase Income Cash

INT - Interest Adjustment - Decrease Income Cash

REPAY Installment Bond Principal Repayment

RREPAY Reversal of Installment Bond Principal Repayment

BREPAY Installment Bond Principal Repayment Rebook

*MATU Maturity

MATU+ Maturity Income Adjustment Transaction

MATU- Maturity Income Adjustment Transaction

*For Installment Bond positions held to maturity, the final principal and interest income payments are expected to be processed with the MATU (Maturity) transaction code.



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”PAYMENT DATA APPLIED” MESSAGE ON BORS When issued by the BORS screen, the message PAYMENT DATA APPLIED indicates that a change in the schedule required additional processing resulting in updates to dependent transactions, taxlots, positions and account and cash balances for open accounting periods of any accounts having holdings in the bond. This message and the associated additional processing takes place when the BORS screen is used to maintain the repayment schedule and either of the following circumstances are detected: a change is made to the schedule and the schedule status is “complete” after the change, or a change is made to the schedule resulting in the schedule status changing from “complete” to “incomplete”.

TAXLOTS AND INSTALLMENT BONDS • The installment (NPV) method yield is calculated and saved on Installment Bond taxlots only

for the purpose of supporting this amortization method. Where a yield is calculated for other purposes (Current Yield, Market Yield, SEC Yield calculation reporting purposes, etc.) standard SIA formulas documented in Section 8.70 Amortization/Accretion are used.

• Taxlots are always maintained for Installment Bonds, and the cost relief on the Installment Bond Principal Repayment (REPAY) transaction is always calculated using the pro-rata relief method (unless manually overridden), regardless of what the account and security definition characteristics might otherwise imply.

NPV STRAIGHT-LINE METHOD OF AMORTIZATION VS. GENERAL STRAIGHT-LINE METHOD The term “straight-line method” in the context of installment (NPV) amortization method discussions should not be confused with the straight-line method of amortization applicable to bonds in general. Certain processing options, etc. which may influence the general straight-line method of amortization do not influence the installment (NPV) method. For example, whereas the amortization option (as seen on the Account Definition (AAAD) screen) influences the results of straight-line amortization on positions for which taxlots are maintained, the option does not influence the results of the installment (NPV) method of amortization (as this method is always contractual settle date based).

CONSTRAINTS • The installment (NPV) method of amortization accrued and/or sold is not calculated (that is,

the result is zero) if one or more of the following negative conditions arise: o The cost basis for the yield calculation is zero (for example, purchase at zero cost). o The cost per 100 par is unreasonable (for example, purchase 100.00 par at 1.00

total cost). o The contractual settle date of purchase is before the issue date of the bond. o The contractual settle date of purchase is after the maturity date of the bond. o The original balance of the bond issue is zero. o The repayment schedule has not been defined (that is, has not been added). o The repayment schedule is “incomplete” (that is, sum of repays is not equal to

original balance). • Installment Bonds must be defined as single-currency securities and may be processed only in

funds for which they will be treated as “domestic” securities. Additionally, UK Unit Trust funds may not hold Installment Bonds.

• The following are not supported for Installment Bonds: • Short positions • OID processing • Taxlot Adjustments • Call/Put features



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11.1 EXAMPLE - THE INSTALLMENT (NPV) AMORTIZATION METHOD APPLIES. Account 17000 purchases an installment bond (for which the installment (NPV) method of amortization is desired) on 01/05/92 (that is, within the long first coupon period of the bond issue). The security is defined through the standard security definition screen progression for bonds (BOBD → BOSB → BODE) as documented in Section 5.20 Security Activities. The BOBD screen appears as follows, where (aside from the usual bond-like security definition considerations) the “IB” ASSET GROUP designation is of most significance: Once a security is defined as having the “IB” Asset Group (on the BOBD screen), the asset group may not be changed due to the unique processing characteristics associated with this asset group.

NEXT BOBD MODE VIEW FDMP43 * * * SECURITY DEFINITION * * * SECURITY NO IB001 SHORT NAME AN INSTALLMENT BOND MODEL SECURITY IND: STATE CODE......................... 80 INCEPTION DATE............... 04 18 95 REPT/NO:... CUSIP (PRICING) NUMBER...... IB001 PRICE CODE......................... B ASSET GROUP........................ IB SEGMENT......................... 0000 CATEGORY......................... 0000 SECTOR.......................... 0000 INDUSTRY......................... 0000 HIGH PRICE RANGE ............... 99.9 LOW PRICE RANGE................. 99.9- SIC CODE........................ CROSS REFERENCE CODE......... ISSUER CODE................... IB001 TRANSACTION GENERATION............. Y LAG DAYS.. 0000 LAG DAYS METHOD.. 1 FEDERAL TAX STATUS.............. T INCOME CATE MAIN................ 0000 INCOME CATE SUB................. 0000 PRICE SOURCE...................... PRICE TYPE.................... BACKUP PRICE SOURCE............... BACKUP PRICE TYPE............. FORM 13F FLAG. Y EXCLUDE MGT FEES N TITLE OF CLASS (CODE)............ ISSUE CURRENCY.. PREC... ISSUE COUNTRY CODE............... INCOME CURRENCY.. PREC... GUARANTOR...................... TRADE CURRENCY.. PREC... PRICE GROUP...................... FRANKED/UNFRANKED.................. BID/OFFER SPREAD (%).. 0.000 ==>



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The BOSB screen appears as follows, where the following characteristics are of particular significance: ACCRUAL METHOD = “A” (coupon bond (actual/actual))

FIRST COUPON DATE = “11/15/92” (the first coupon period is “long”)

ISSUE DATE = “01/01/92”

INTEREST RATE = “9.25(%)” (the fixed annual interest percentage rate of the bond)

MATURITY DATE = “09/01/1997” (the last coupon period is “short”)

PYMT FREQ = “S” (coupons are paid semi-annually)

PAYMENT MONTH/DAY = “11/15” (11/15 and 05/15 are standard coupon payment dates)

AMORTIZATION/ACCRETION = “I” (installment (NPV) method is desired)

ORIGINAL BAL = “120,000,000.00” (the original balance of principal at issue date)

NEXT BOSB MODE VIEW FDMP46 * * * SECURITY DEFINITION - BOND * * * SECURITY NO: IB001 AN INSTALLMENT BOND BOND CODE .1 1ST PWDN DATE.. ACCR METH.A ACCR OPT. INT PUR. FIRST COUPON DATE .......... 11 15 92 ISSUE DATE ................. 01 01 92 INTEREST RATE ... 9.250000000 MATURITY DATE ............ 09 01 1997 COMPOUNDING OPT.. PYMT FREQ.. S PAYMENT MONTH/DAY ............. 11 15 AMORT/ACCRET..I INFLAT INDEX.. DEFAULT DATE.. CPN CC MSTR NOTE FLOOR (000) .... 0 ISSUE PRICE ... 0.00000000 MSTR NOTE CEILING (000) .. 0 RATING: S and P MOODYS MATRIX CODE ...................... ORIGINAL BAL... 120,000,000.00 EFF MATY DATE.. CCYY PREPAY.. PAR OUTSTANDING.. 0.00 BENCHMARK.. CCYY RATE CHANGE FREQ.. INCREMENT.. BENCHMARK SPREAD ......... 0.00000 FIRST DATE.. 00 00 00 MONTH-END... ANNUAL RATE TYPE ............... CONSTANT DTM. 2A-7. DEMAND. AMORT TO EFF MATY DATE..N ACTIVE.. CLASS OF SHARES 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... 00 00 00 NOTE: RATES FOR MULTIPLE RATE ITEMS ARE NOT ENTERED HERE ==>

The BORS screen appears as follows, where the following characteristics are of particular significance: • The STATUS (determined by the system) is “COMPLETE”, as the sum total of principal REPAY

AMOUNTs equals the ORIGINAL BALANCE of 120,000,000.00. (The ORIGINAL BALANCE is based on security definition characteristics defined on the BOSB screen. A complete schedule is required in order for the installment (NPV) method of amortization to be calculated).

• The CASH FLOW DATEs include (and are restricted to) all interest coupon dates from issue to maturity (as determined by the system based on security definition characteristics defined on the BOSB screen).

• The user-maintained REPAY AMOUNTs indicate that principal repayments are not scheduled to begin until 11/15/94 and that subsequent principal repayments are regular in frequency (that is, there are no subsequent cash flow dates for which a principal repayment is not scheduled).



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• The INTEREST AMOUNTs are based on what remains of the ORIGINAL BALANCE at each cash flow date assuming the principal balance is repaid according to schedule (as determined by the system based on security definition characteristics defined on the BOSB screen and on principal REPAY AMOUNTs defined by means of the BORS screen).

The EFF MATURITY dates (depended on for reporting purposes only) are based on security definition characteristics - defined on the BOSB screen, and on principal REPAY AMOUNTs, defined on the BORS screen.

NEXT BORS MODE VIEW FDMP256 * * * REPAYMENT SCHEDULE * * * SECURITY: IB001 AN INSTALLMENT BOND DATE: 09 01 97 ORIGINAL BALANCE: 120,000,000.00 STATUS: COMPLETE CASH FLOW INTEREST EFF DATE REPAY AMOUNT AMOUNT MATURITY 11/15/92 0.00 9,666,758.24 01/13/96 05/15/93 0.00 5,550,000.00 01/13/96 11/15/93 0.00 5,550,000.00 01/13/96 05/15/94 0.00 5,550,000.00 01/13/96 11/15/94 26,700,000.00 5,550,000.00 01/13/96 05/15/95 22,400,000.00 4,315,125.00 05/14/96 11/15/95 19,000,000.00 3,279,125.00 09/06/96 05/15/96 16,200,000.00 2,400,375.00 12/24/96 11/15/96 13,800,000.00 1,651,125.00 04/04/97 05/15/97 12,000,000.00 1,012,875.00 07/02/97 ****** PRESS ENTER FOR MORE REPAYMENTS

NEXT BORS MODE VIEW FDMP256 * * * REPAYMENT SCHEDULE * * * SECURITY: IB001 AN INSTALLMENT BOND DATE: 11 15 92 ORIGINAL BALANCE: 120,000,000.00 STATUS: COMPLETE CASH FLOW INTEREST EFF DATE REPAY AMOUNT AMOUNT MATURITY 09/01/97 9,900,000.00 271,241.17 09/01/97 ****** END OF REPAYMENTS ******



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All amounts on the BORS screen (whether maintained by the user or by the system) are relative to the entire bond issue (not to a particular taxlot or position). In the example, the INTEREST AMOUNT for the long coupon period leading up to the first CASH FLOW DATE (11/15/92) is calculated based on the ORIGINAL BALANCE, using the general method described in Section 8.30 Accrued Income for calculating accrued income on fixed income bonds using accrual method “A”. This calculation is approximated as follows:

(((120,000,000 * 9.25%) / 2) * 135/182) + (((120,000,000 * 9.25%) / 2) = 9,666,758.24 The INTEREST AMOUNTs for the next four CASH FLOW DATEs are based on the ORIGINAL BALANCE and on regular semi-annual coupons using the general method described in Section 8.30 Accrued Income for calculating accrued income on fixed income bonds using accrual method “A”. The calculation for each of these CASH FLOW DATEs is approximated as follows:

(((120,000,000 * 9.25%) / 2) = 5,550,000.00 Starting with the 11/15/94 CASH FLOW DATE the INTEREST AMOUNTs are based on the ORIGINAL BALANCE less REPAY AMOUNTs to date. For example, the calculation for the INTEREST AMOUNT for the 11/15/94 CASH FLOW DATE is approximated as follows:

((((120,000,000-26,700,000) * 9.25%) / 2) = 4,315,125.00 The EFF MATURITY DATEs seen on BORS are calculated using the method described in Section 5.20 Security Activities for calculating effective maturity date on Installment Bonds. For example, the calculation for the EFF MATURITY DATE leading up to the 05/15/96 CASH FLOW DATE (or 12/24/96) is approximated as follows: • There are 475 days from the 05/15/96 cash flow date to the 09/01/97 maturity date

(including both dates). • There are 291 days from the 11/15/96 cash flow date to the 09/01/97 maturity date

(including both dates). • There are 110 days from the 05/15/97 cash flow date to the 09/01/97 maturity date

(including both dates).

475 days * the 05/15/96 16,200,000 REPAY AMOUNT = 7,695,000,000.00 291 days * the 11/15/96 13,800,000 REPAY AMOUNT = 4,015,800,000.00 110 days * the 05/15/97 12,000,000 REPAY AMOUNT = 1,320,000,000.00 7,695,000,000.00 + 4,015,800,000.00 + 1,320,000,000.00 = 13,030,800,000.00 16,200,000.00 + 13,800,000.00 + 12,000,000.00 + 9,900,000.00 = 51,900,000.00 09/01/97 less 13,030,800,000.00 / 51,900,000.00 days = 12/24/96 EFF MATURITY



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The purchase of the Installment Bond represented in the example into account 17000 is entered and would be viewed within Investment Accounting (InvestOne) as follows:

NEXT VSTE MODE VIEW FDMP115 TRADE CORRECTION MEMO NUMBER 00044707 ACCOUNT NUMBER.... 000000000017000 WARDENCLYFFE TOWER FUND SECURITY NUMBER... IB001 EFF DT 01 05 92 TR CD BUY DSC CD GST RV 0.00 S EXTERNAL ID. C/S DATE. 01 05 92 A/S DATE. 01 05 92 TR.DATE 01 05 92 W/S FG AN INSTALLMENT BOND SIDE PCKT. B/ID ASST EVNT SRC ADVISOR CODE: SHARES/PAR... 25,000,000.0000 INTEREST RATE..............9.25 PRICE/SHARE..... 106.940520 MATURITY DATE.............. 09/01/97 COMM.. 0.00 EFFECTIVE YIELD........... 7.7311045 SEC FEE 0.00 LOC CODE PRIN....... 26,735,129.99 F/P R/CASH 0.00 S E/M 00 00 0000 INC 25,412.09 COM MEM TC 26,760,542.08 H/I N SD EX GST PD 0.00 S BROKER. 01 C/BRKR L/S/S C/F C/O ISSUE PR.. 0.00000000 C/I C C/R P/A D/E 0.00 CST ASGN GST RCL 0.00 S AMORTIZATION. 0.00 COST 26,735,129.99 CONFIRM. C SWP=>

For purposes of computing amortization on the taxlot established by the above purchase, an installment (NPV) method cost yield to maturity of 7.1919009% is first calculated by the system using the contractual settle date 01/05/92. The yield is calculated using an iterative process to arrive at a yield that supports the original cost as the price at contractual settle date of purchase. See Section 8.70, Amortization/Accretion for the Installment (NPV) Yield Formula. The calculation could be simulated on the Bond Calculator (CALC) screen as follows:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: IB001 AN INSTALLMENT BOND DATE: 01 05 1992 COMPUTE PRICE OR YIELD: Y TO MATURITY OR CALL: M ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 01 01 92 MATU/CALL DATE.. 09 01 1997 FIRST COUP DATE. 11 15 92 PAYMENT MM/DD... 11 15 INTEREST RATE... 9.25000000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 25,000,000.00 DOLLAR VALUE.... 26,735,129.99 PRICE........... 106.9405200 YIELD........... 7.1919009 PURCHASED INT... 25,412.09 PURCHASE DATE... 00 00 00 NBR-PAYM-TO-MAT= 00011 NBR-ITERATIONS= 0003 FORMULA I (NPV)



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If 01/05/92 is a valuation date of the account in the example then one day of accrued amortization will be computed on the taxlot by performing a series of calculations. Price-given yield calculations are performed twice: once at the prior cash flow date (or at contractual settle date of purchase if no cash flow dates have yet been encountered) and again at the next cash flow date. See Section 8.70, Amortization/Accretion for the Installment (NPV) Price Formula. For each of the price-given yield request dates the 7.1919009% cost yield to maturity supporting the original cost as the net present value at contractual settle date of purchase is used. The difference between the results of the two price-given yield requests is to be amortized in a straight-line manner and on a contractual settle date basis over the actual days in the period. In our example, performing the price-given yield calculation at 01/05/92 (contractual settle date of purchase, since no scheduled cash flow dates have yet been encountered) and extending the result to the 25,000,000.00 par amount in the taxlot provides a result of 26,735,129.96 (which closely approximates the purchase cost). The calculation could be simulated on the Bond Calculator (CALC) screen as follows:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: IB001 AN INSTALLMENT BOND DATE: 01 05 1992 COMPUTE PRICE OR YIELD: P TO MATURITY OR CALL: M ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 01 01 92 MATU/CALL DATE.. 09 01 1997 FIRST COUP DATE. 11 15 92 PAYMENT MM/DD... 11 15 INTEREST RATE... 9.25000000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 25,000,000.00 DOLLAR VALUE.... 26,735,129.96 PRICE........... 106.9405198 YIELD........... 7.1919009 PURCHASED INT... 25,412.09 PURCHASE DATE... 01 05 92 NBR-PAYM-TO-MAT= 00000 NBR-ITERATIONS= 0000 FORMULA I (NPV)



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Performing the price-given yield calculation at 11/15/92 (the next scheduled cash flow date) and extending the result provides a result of 26,421,325.80. The calculation could be simulated on the Bond Calculator (CALC) screen as follows:

NEXT CALC MODE REPORT FDMP84 * * * BOND CALCULATOR * * * SECURITY NO: IB001 AN INSTALLMENT BOND DATE: 11 15 1992 COMPUTE PRICE OR YIELD: P TO MATURITY OR CALL: M ACCRUAL METHOD.. A PAYMENT FREQ.... S ISSUE DATE...... 01 01 92 MATU/CALL DATE.. 09 01 1997 FIRST COUP DATE. 11 15 92 PAYMENT MM/DD... 11 15 INTEREST RATE... 9.25000000 MATU/CALL VALUE. 100.0000000 PAR VALUE....... 25,000,000.00 DOLLAR VALUE.... 26,421,325.80 PRICE........... 105.6853032 YIELD........... 7.1919009 PURCHASED INT... 0.00 PURCHASE DATE... 01 05 92 NBR-PAYM-TO-MAT= 00000 NBR-ITERATIONS= 0000 FORMULA I (NPV)

The difference in the two extended price-given yield results (that is, -313,804.16) is to be spread over the actual days from 01/05/92 to 11/15/92 (that is, 315 days). The amortization balance at 01/05/92 is arrived at by adding 1/315th of -313,804.16 (or -996.20) to 26,735.129.96, resulting in an extended book value of 26,734,133.76, and then subtracting the cost balance of 26,735.129.99, resulting in an accrued amortization balance of -996.23 as of the 01/05/92 position date, which can be viewed on the Taxlot Holdings View (VSTH) screen as follows:

NEXT VSTH MODE REPORT FDMP98 * * * TAX LOT HOLDINGS VIEW * * * ACCOUNT NO: ...... 000000000017000 WARDENCLYFFE TOWER FUND SECURITY NO: ........... IB001 CCYY HOLDINGS DATE: .......... 01 05 92 AN INSTALLMENT BOND BASIS (T,S): ................... T B/L: ........ L --MEMO- --DATE-- ------SHARES/PAR----- --------COST------- --AMORT/ACCRET--- 44707 01/05/92 25,000,000.0000 26,735,129.99 996.23- HOLDING 01/05/92 25,000,000.0000 26,735,129.99 996.23- END OF REQUEST



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The process is repeated at each valuation date leading up to the first cash flow date such that full amortization towards the 11/15/92 net present value occurs on the day prior to that date (that is, the amortized cost value at a given date includes one day of amortization accrued towards the net present value to be reached by the next cash flow date). This treatment is consistent with other contractual settle date-based amortization methods. The Repayment Schedule (BORS) screen used in the example indicates that interest payments are scheduled to commence on 11/15/92 and that the bond matures on 09/01/97 (based on Security Definition - Bond (BOSB) characteristics). The transaction amounts associated with these events are calculated as they would be for any other fixed income coupon bond, and the corresponding INT (Interest Collected) and MATU (Maturity) transaction codes should be used to process these events accordingly. The schedule also indicates that principal repayments commence on 11/15/94 (based on user-maintained REPAY AMOUNT entries). The amount of principal to be repaid at a given cash flow date is based on the BORS screen data factored down to the position to arrive at the amount to be repaid on a given position. The amount is calculated to two decimal places and entered as the shares/par and principal amounts on a REPAY (Installment Bond Principal Repayment) transaction to process the event. The transaction amounts are manually calculated and the transaction manually entered (unless the transaction is optionally generated). Where multiple taxlots exist for a given position, the taxlot relief is done in a pro-rata manner to keep the relationship of principal repayment amounts relative to a given taxlot consistent with the amounts scheduled (in BORS) relative to the entire bond issue. Using these inputs from the example:

• 26,700,000.00 (11/15/94 REPAY AMOUNT per BORS);

• 25,000,000.00 (pre-repay contractual settled par amount in the position);

• 120,000,000.00 (pre-repay ORIGINAL BALANCE less REPAY AMOUNTs to date per BORS),

The 11/15/94 principal repayment in the example would need to be factored down to the position (in order to process the 11/15/94 principal repayment transaction event):

26,700,000.00 * 25,000,000.00 / 120,000,000.00 = 5,562,500.00



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The 11/15/94 principal repayment for account 17000's position in the Installment Bond represented in our example is entered and would be viewed within Investment Accounting (InvestOne) as follows:

NEXT VSTE MODE VIEW FDMP115 TRADE CORRECTION MEMO NUMBER 00045031 ACCOUNT NUMBER.... 000000000017000 WARDENCLYFFE TOWER FUND SECURITY NUMBER... IB001 EFF DT 11 15 94 TR CD REPAY DSC CD GST RV 0.00 S EXTERNAL ID. C/S DATE. 11 15 94 A/S DATE. 11 15 94 TR.DATE 11 15 94 W/S FG AN INSTALLMENT BOND SIDE PCKT. B/ID ASST EVNT SRC ADVISOR CODE: SHARES/PAR... 5,562,500.0000 INTEREST RATE..............9.25 PRICE/SHARE..... 100.000000 MATURITY DATE.............. 09/01/97 COMM.. 0.00 EFFECTIVE YIELD........... 7.7311045 SEC FEE 0.00 LOC CODE PRIN....... 5,562,500.00 F/P R/CASH 0.00 S E/M 00 00 0000 INC 0.00 COM MEM TC 5,562,500.00 H/I N SD EX GST PD 0.00 S BROKER. 01 C/BRKR L/S/S C/F C/O ISSUE PR.. 0.00000000 C/I C C/R P/A D/E 0.00 CST ASGN GST RCL 0.00 S AMORTIZATION. 386,066.42 COST 5,948,566.42 CONFIRM. C SWP=>

Since the position in the example is comprised of one taxlot, the REPAY principal, shares/par, cost and amortization amounts relieved from or associated with the taxlot will be consistent with those viewed on the transaction in total. The amount of amortization sold through the REPAY transaction is calculated as the difference between the principal and cost amounts of the total transaction, as the entire premium or discount associated with the cost of the principal repayment is fully amortized at that repayment date. No portions of premium or discount still accruing towards future and as yet uncollected repayments (anticipated by the underlying yield per the repayment schedule data) are taken yet as amortization sold. NOTE: For more graphic representations of amortization/accretion decision-making processes (including those pertaining to Installment Bonds), see Conversion, Reports and Amortization/ Accretion Decision Charts at the end of this section.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION THE DE MINIMUS RULE


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12 THE DE MINIMUS RULE An account-level option is available in Investment Accounting (InvestOne) to invoke the De Minimus Rule where bond discount would otherwise be treated as ordinary income (by accruing and/or taking the discount at point of sale as accretion). In general, the rule states that if a bond's discount is not greater than 1/4 of 1% of the stated redemption price of the bond at maturity multiplied by the number of whole years to maturity from the time of purchase, then the market discount shall be considered to be zero. For mortgage-backed securities, the threshold of 1/6 of 1% is substituted for the 1/4 of 1% threshold. For OID bonds as held in an account electing OID processing (see TaxLot Level OID Processing), the De Minimus Rule is applied to the OID and market discounts as two separate analyses: for market discount, the rule is applied as stated above; for OID, the rule is applied similarly, but issue date is substituted for acquisition date in calculating the number of whole years to maturity. For OID municipal bonds, the rule is applied to market discount, but not to OID. The De Minimus test is performed only if elected through the DE MINIMUS field on the Account Definition (AAAD) screen. Valid values for this field are as follows: N - Do not perform the De Minimus test. Y - Perform the De Minimus test for qualifying securities and purchases. By selecting DE MINIMUS option “Y”, the De Minimus test is performed as described above. Where the resulting discount falls under the De Minimus Rule, it will not be accrued or taken at point of sale as accretion. Where the resulting discount does not fall under the De Minimus Rule, the discount will be accrued and/or taken at point of sale according to the various account and security definition characteristics elected by the user and described elsewhere in this section.

CONSTRAINTS • The De Minimus option is valid only for taxlot accounts.

• Securities qualifying for manual input of amort/acret are not eligible for De Minimus Rule processing.

• The De Minimus option is allowed only for accounts for which some method of accretion applies (for example, general accretion of discount to maturity or to call/put, OID or OID and market discount accretion to maturity or to call/put, market discount as accretion at point of sale or some combination thereof). Unless the De Minimus test results in the purchase falling under the De Minimus Rule, the discount will be handled as dictated by other characteristics of the account and security and as previously documented.

An example of the application of the De Minimus Rule within Investment Accounting (InvestOne) follows.



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12.1 EXAMPLE: DE MINIMUS RULE WITHIN INVESTMENT ACCOUNTING (INVESTONE) Account 16000 elects DE MINIMUS option “Y”. Other account characteristics as defined to:

NEXT AAAD MODE REPORT FDMP03 * * * ACCOUNT DEFINITION * * * ACCOUNT NO.......... 000000000016000 SHORT NAME INVESTOR'S MUTUAL FUND RPT-ACC NO: REPORTING PRIORITY CODE............ * STATUS (A,E,X,Y,*)................ E STATUS DATE................. 07 01 94 INCEPTION.................. 12 31 94 VERIFICATION................ 12 31 94 BALANCE.................... 12 31 95 SCHEDULE.................... 12 31 95 DATA SOURCE....................... M FISCAL YEAR END.................. 12 ASSET CONCENTRATION %......... 0.00 TAX METHOD..... TAXLOT CODE.... H INCOME PROCESSING CODE............ D CASH PROCESSING CODE.............. I PRICING PROCESSING CODE........... * COST ASSIGNMENT CODE.............. F GNMA GENERATION................... N ACCOUNT TYPE...................... TRANSACTION GENERATION............ N TRAN GENERATOR 'TO-DATE'.... LAG DAYS....................... 0000 OLDEST EFFT DATE CAPTURED... AMORT/ACCRET METHOD 3 DE MINIMUS Y GAIN/LOSS COST FOR AMORT/ACCRET.... 1 ACCR METHODS NOT TO AMORT.. ACCRUED INCOME OPTION.............. ACCOUNT INDICATOR................ GROUP ACCOUNT NO.... 000000000000000 AMORT TO CALL.. 0 BOUNDARIES.... 0 OVERRIDE FUTURES SCTY G/L TREATMENT AMORTIZATION OPTION.............. ADJUST INCOME CODE................. N OID. 0 MKT DISC AT POINT OF SALE. N TAX STATUS.... E CONFIRM DEFAULT.. C TEST ACCOUNT INDICATOR........... N CALENDAR...... CORP-ACT PROCESS. N



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Two purchases of security number 985MKTDEM are entered into the account and would be viewed as follows:

NEXT VSTE MODE VIEW FDMP115 TRADE CORRECTION MEMO NUMBER 00042260 ACCOUNT NUMBER.... 000000000016000 INVESTOR'S MUTUAL FUND SECURITY NUMBER... 985MKTDEM EFF DT 06 01 95 TR CD BUY DSC CD GST RV 0.00 S EXTERNAL ID. C/S DATE. 06 03 95 A/S DATE. 06 05 95 TR.DATE 05 31 95 W/S FG MARKET-DISCOUNTED BOND SIDE PCKT. B/ID ASST EVNT SRC ADVISOR CODE: SHARES/PAR... 1,000,000.00000 INTEREST RATE..............5.0 PRICE/SHARE..... 92.70000000 MATURITY DATE.............. 05 31 2025 COMM.. 0.00 EFFECTIVE YIELD........... 5.4996077 SEC FEE 0.00 LOC CODE PRIN....... 927,000.00.00 F/P R/CASH 0.00 S E/M 00 00 0000 INC 409.84 COM MEM TC 927,409.84 H/I N SD EX GST PD 0.00 S BROKER. 01 C/BRKR L/S/S C/F C/O ISSUE PR.. 0.00000000 C/I C C/R P/A D/E 0.00 CST ASGN GST RCL 0.00 S AMORTIZATION. 0.00 COST 927,000.00 CONFIRM. C SWP=>

NEXT VSTE MODE VIEW FDMP115 TRADE CORRECTION MEMO NUMBER 00042261 ACCOUNT NUMBER.... 000000000016000 INVESTOR'S MUTUAL FUND SECURITY NUMBER... 985MKTDEM EFF DT 06 06 95 TR CD BUY DSC CD GST RV 0.00 S EXTERNAL ID. C/S DATE. 06 07 95 A/S DATE. 06 11 95 TR.DATE 06 05 95 W/S FG MARKET-DISCOUNTED BOND SIDE PCKT. B/ID ASST EVNT SRC ADVISOR CODE: SHARES/PAR... 1,000,000.00000 INTEREST RATE..............5.0 PRICE/SHARE..... 92.70000000 MATURITY DATE.............. 05 31 2025 COMM.. 0.00 EFFECTIVE YIELD........... 5.4996338 SEC FEE 0.00 LOC CODE PRIN....... 927,000.00.00 F/P R/CASH 0.00 S E/M 00 00 0000 INC 956.28 COM MEM TC 927,956.28 H/I N SD EX GST PD 0.00 S BROKER. 01 C/BRKR L/S/S C/F C/O ISSUE PR.. 0.00000000 C/I C C/R P/A D/E 0.00 CST ASGN GST RCL 0.00 S AMORTIZATION. 0.00 COST 927,000.00 CONFIRM. C



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The security's definition characteristics as defined to Investment Accounting (InvestOne) are as follows:

NEXT BOBD MODE VIEW FDMP43 * * * SECURITY DEFINITION * * * SECURITY NO 985MKTDEM SHORT NAME MARKET-DISCOUNTED BOND MODEL SECURITY IND: STATE CODE ........................ 80 INCEPTION DATE .............. 06 28 94 REPT/NO:... CUSIP (PRICING) NUMBER...... 985MKTDEM PRICE CODE......................... C ASSET GROUP........................ B SEGMENT......................... 0000 CATEGORY......................... 0000 SECTOR.......................... 0000 INDUSTRY......................... 0000 HIGH PRICE RANGE................ 99.9 LOW PRICE RANGE................. 99.9- SIC CODE........................ CROSS REFERENCE CODE......... ISSUER CODE .................. 985MKT TRANSACTION GENERATION............. Y GENERATED TRANSACTION LAG-DAYS.. 0000 FEDERAL TAX STATUS.............. T INCOME CATE MAIN................ 0000 INCOME CATE SUB................. 0000 PRICE SOURCE.................... PRICE TYPE.................... BACKUP PRICE SOURCE............. BACKUP PRICE TYPE............. FORM 13F FLAG...................... Y TITLE OF CLASS (CODE)............ ISSUE CURRENCY.. PREC... ISSUE COUNTRY CODE............... INCOME CURRENCY.. PREC... GUARANTOR...................... TRADE CURRENCY.. PREC... PRICE GROUP...................... FRANKED/UNFRANKED.................. BID/OFFER SPREAD (%)........ 0.000

NEXT BOSB MODE CHANGE FDMP46 * * * SECURITY DEFINITION - BOND * * * SECURITY NO: 985MKTDEM MARKET-DISCOUNTED BOND BOND CODE .1 1ST PWDN DATE.. ACCR METH.A ACCR OPT. INT PUR. FIRST COUPON DATE .......... 00 00 00 ISSUE DATE ................. 00 00 00 INTEREST RATE ... 5.00000000 MATURITY DATE ............ 05 31 2025 COMPOUNDING OPT.. PYMT FREQ..S PAYMENT MONTH/DAY ............. 05 31 AMORT/ACCRET..S INFLAT INDEX.. DEFAULT DATE.. CPN CC MSTR NOTE FLOOR (000) .... 0 ISSUE PRICE .. 0.00000000 MSTR NOTE CEILING (000) .. 0 RATING: S and P MOODYS MATRIX CODE.... TBA FLAG.. ORIGINAL BAL.... EFF MATY DATE.. CCYY PREPAY.. PAR OUTSTANDING.. 0.00 BENCHMARK.. CCYY RATE CHANGE FREQ.. INCREMENT.. BENCHMARK SPREAD ......... 0.00000 FIRST DATE.. 00 00 00 MONTH-END... ANN RATE TYPE ....... GNMA GEN .. CONSTANT DTM ................... AMORT TO EFF MATY DATE..N ACTIVE.. CLASS OF SHARES REF X CCB DAYS... CONTRA EXPENSE...N EFF MATY PRICE..100.00000 MATU SEC YIELD: MAX. MIN. SEC OVR EFF MAT LEN REPORT AS CASH. PEP EXPIRY EFFECTIVE MATY REF-DATE... 00 00 00 NOTE: RATES FOR MULTIPLE RATE ITEMS ARE NOT ENTERED HERE



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For the first purchase (memo number 42260), the De Minimus test is performed as follows: 1,000,000.0000 - 927,000.00 = 73,000.00 (1,000,000.0000 * .0025) * 30 = 75,000.00

73,000.00 is not greater than 75,000.00, so the purchase falls under the De Minimus Rule and the market discount will therefore not be accrued nor taken at point of sale as accretion. For the second purchase (memo number 42261), the De Minimus test is performed as follows:

1,000,000.0000 - 927,000.00 = 73,000.00 (1,000,000.0000 * .0025) * 29 = 72,500.00

73,000.00 is greater than 72,500.00, so the purchase does not fall under the De Minimus Rule and the market discount will therefore be accrued in the same manner as it would had the De Minimus option not been selected for the account. Had the above example been that of a mortgage-backed security (that is, BOBD ASSET GROUP “G1”, “G2”, “FH”, “FM”, “MR” or “RE”), neither purchase would have fallen under the De Minimus Rule, as 73,000.00 is greater than the result of the test for mortgage-backed bonds as performed on either of the two purchases:

(1,000,000.0000 * .00167) * 30 = 50,100.00 (1,000,000.0000 * .00167) * 29 = 48,430.00

In performing the De Minimus test, the “...whole years to maturity from the time of purchase...” component can be clarified by further example as follows: For a given bond, if maturity date was 08/01/2004, then:

• A purchase trade date of 08/02/1994 would result in 9 years; • A purchase trade date of 07/31/1995 would result in 9 years; • A purchase trade date of 08/01/1995 would result in 9 years; • A purchase trade date of 08/02/1995 would result in 8 years.

For more graphic representations of amortization/accretion decision-making processes (including the De Minimus Rule), see Conversion, Reports and Amortization/Accretion Decision Charts at the end of this section.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION AMORTIZATION OF SHORT POSITIONS


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13 AMORTIZATION OF SHORT POSITIONS Investment Accounting (InvestOne) supports the amortization of short positions. The calculations used for the amortization methods supported (with exception as described below) are identical to those described in Section 8.70 of the System Manual. The definitions of premium and discount as related to short positions are exactly opposite to those for long positions as described below: Short Premium Cost value is less than the par value in nominal terms but greater than in

absolute terms: That is, cost value = (1,100) and par value = (1,000)

Short Discount Cost value is greater than the par value in nominal terms but less than in absolute terms: That is, cost value = (900) and par value = (1,000)

Although the definitions are exactly opposite, similar to long positions, short premiums are amortized and short discounts are accreted. Amortization of short premiums results in positive income and accretion of short positions results in negative income. All features currently supported for long positions with the exception of those listed below are supported for the amortization of short positions. The following features are excluded: • Amortization/accretion of short positions using the alternate short sale processing. In

general, this method defers collection/payment of cash until the short position is covered. • Foreign securities with trade currency and/or income currency not equal to issue currency. • Treatment of amortization/accretion on short positions as expense. • OID processing for short positions. • De Minimus processing for short positions. • Point of sale processing for short positions. • Support for amortization/accretion of short positions to call/put date/price and associated

best/worst options. • Boundary processing related to amortization/accretion to call/put date/price. • Amortization/accretion method “C” or “I” for short positions. In order to invoke amortization of short positions the account level field “Amort Short” must have a value of “Y”.



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14 FAS91 COMPLIANT AMORTIZATION FOR MORTGAGE BACK SECURITIES In December 1986, the Financial Accounting Standards Board (FASB) issued Statement Number 91 effective for fiscal years beginning after December 15, 1987. This pronouncement focuses on the accounting for nonrefundable fees and costs associated with lending, committing to lend, or purchasing a loan or group of loans. The applicability to Investment Accounting (InvestOne) stems from the adjustments allowable to the amortization convention employed for investments which represent a loan, group of loans, or loan backed securities (that is, pass-through certificates, collateralized mortgage obligations, and other so-called "securitized" loans). SFAS No. 91 allows two basic methods of accounting for interest income (that is, amortization booked as ordinary income) for mortgage loans and debt securities that are pre-payable. The first method is based on the contractual cash flows determined at the time of purchase without regard to any prepayments anticipated to arise in the future. As prepayments are experienced, the discount or premium related to such prepayments is adjusted in the interest income for that period. The second method is based on anticipated cash flows with estimated prepayments embedded in those cash flows. The Financial Accounting Standards Board (FASB) does not require estimation of prepayments under SFAS No. 91. The method may be used if a pool of underlying mortgage loans consists of a large number of mortgage loans or similar assets with substantially similar characteristics such that prepayments can be reasonably estimated. In every reporting period, investors are required to make adjustments to the effective yield to maturity, and hence future interest income, based on the actual prepayment experience to date and the expected future prepayment experience of the underlying mortgage loans. Investment Accounting (InvestOne) supports FAS91 through account and security settings. When FAS91 compliant amortization is chosen for Mortgage Backed Securities (MBS), the effective interest method of amortization (rather than straight-line, scientific, or level yield) is used on compliant taxlots. The calculations used for FAS91 amortization are described in Section 8.70 of the System Manual.

ACCOUNT SETTINGS For an account to be FAS91 compliant the FAS91 field on AAAD must be set to 1, 2, 3, or 4. 1. FAS91 compliant amortization on Mortgage Backed Securities using the effective interest

method, doing retrospective adjustments for changes in anticipated prepayments computed from a Constant Prepayment Rate (CPR).

2. FAS91 compliant amortization on MBS using the effective interest method, doing retrospective adjustments for changes in anticipated prepayments computed from Prepayment Speed Assumptions (PSA).

3. FAS91 compliant amortization on MBS using the effective interest method. Prospective adjustments taken when actual prepayment experience varies from what had been projected are made by adjusting the remaining projected payment amounts such that they continue to support the original yield and target redemption date.

4. FAS91 compliant amortization on MBS using the effective interest method. Prospective adjustments taken when actual prepayment experience varies from what had been projected are made by adjusting the target redemption date such that it continues to support the original yield and remaining projected payment amounts.



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If the FAS91 field on AAAD is blank, then the account is not FAS91 compliant. MBS calculates amortization based on the account and security amortization settings. FAS91 requires positions where taxlots are maintained.



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SECURITY SETTINGS These security settings are valid for FAS91. BOBD Asset Group

G1 GNMA1 FH FHLMC

G2 GNMA2 MR Mortgage Related

FM FNMA

Price Code

B BOND LIKE MARKET PRICED (market value derived as par times price divided by 100).

C AMORTIZED COST (market derived as cost plus accrued amortization).

BOSB Accrual Method

A Actual/actual fixed rate E 30/360 floating rate

D 30/360 fixed rate F Actual/actual floating rate

Amortization/Accretion

Y Straight-Line

S Scientific

L Level Yield FAS91 processing is valid for securities that mature within 60 years. Securities with a maturity greater than 60 years are not supported.

14.1 EFFECTIVE INTEREST METHOD If the taxlot qualifies for FAS91, a cost yield to maturity* is computed upon entry of the acquisition transaction when Inventory is invoked. This applies the accounting effects of the transaction. The yield is computed to all projected cash flow amounts and dates leading up to and including the maturity date*, even if the account and/or security characteristics indicate to amortize to CALL/PUT dates. This is because FAS91 compliance requires amortization to the maturity date* in all cases, and does not allow for amortization to CALL/PUT dates. If amortization to effective maturity is selected at the security level, effective maturity price is ignored and treated as though it were 100. *Or optionally, to effective maturity, if amortization to effective maturity is selected. All FAS91 compliant effective interest amortization methods require that projected interest and principal cash flows be computed first, before a cost yield given the cash flows can be computed. For the cost yield calculation, all cash flows are computed relative to the:

• Taxlot shares/par acquired. • Contractual settle date of acquisition. • Interest rate in effect at contractual settle date of acquisition.



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Regardless of the specific FAS91 method, a cost yield given the computed cash flows is first required where the price given the cost yield, netted with the cost of acquisition, equates to zero. That is, the net current value given the yield at contractual settle date of acquisition is zero, as the current value at the same date is equal to the acquisition cost. Even if irregular first and/or last coupon periods are found per BOSB security settings, the BOSB security settings are interpreted such that all cash flows are anticipated to occur on regular cycles. “Quasi-coupon dates” are what the coupon dates would be based solely on payment frequency and payment month/day (that is, without regard for issue date, first coupon date, and/or maturity date). “Quasi-coupon periods” are what the coupon periods would be based solely on payment frequency and payment month/day (that is, without regard for issue date, first coupon date, and/or maturity date). For purposes of constructing cash flows required for the Effective Interest Method of Amortization, BOSB security settings are interpreted as follows:

• If the first coupon period is long or short due to issue date not falling on a quasi-coupon date, move issue date to the quasi-coupon date less and nearest to issue date

• If the first coupon period is long due to the period from issue date to first coupon date exceeding one quasi-coupon period, move first coupon date to the quasi-coupon date greater than and nearest to issue date

• If the last coupon period to effective maturity date is short due to effective maturity date not falling on a quasi-coupon date, move effective maturity date to the quasi-coupon date less than and nearest to effective maturity date

• If the last coupon period to stated maturity date is short due to stated maturity date not falling on a quasi-coupon date, move stated maturity date to the quasi-coupon date less than and nearest to stated maturity date

Following is an illustration of the interpretation of BOSB security settings for purposes of constructing cash flows required for the Effective Interest Method of Amortization: Actual BOSB security settings:

Example Issue Date

First Coupon

Date Pymnt Freq

Payment Month/Day

Maturity Date

1 01/01/07 02/01/07 M 01/01 07/01/07 2 01/01/07 02/01/07 M 01/01 06/19/07 3 01/16/07 02/01/07 M 01/01 07/01/07 4 01/16/07 02/01/07 M 01/01 06/19/07 5 01/16/07 03/01/07 M 01/01 07/01/07 6 01/16/07 03/01/07 M 01/01 06/19/07



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Interpretation of the above BOSB security settings for purposes of constructing cash flows required for the Effective Interest Method of Amortization:

Example Issue Date

First Coupon

Date Pymnt Freq

Payment Month/Day

Maturity Date

1 01/01/07 02/01/07 M 01/01 07/01/07 2 01/01/07 02/01/07 M 01/01 06/01/07 3 01/01/07 02/01/07 M 01/01 07/01/07 4 01/01/07 02/01/07 M 01/01 06/01/07 5 01/01/07 02/01/07 M 01/01 07/01/07 6 01/01/07 02/01/07 M 01/01 06/01/07

1. Cash flows are projected at each regular cycled payment date to maturity (or optionally, to

effective maturity, if amortization to effective maturity is selected), where: 2. Regardless of the specific FAS91 method, contractual principal cash flows are first

computed assuming level payments (that is, principal plus income) per cash flow date, unless the first principal cash flow is delayed per the security definition.

3. Then, if required per the FAS91 method elected for the account, projected principal payments are adjusted for prepayment assumptions, based on either PSA or CPR rates or rate sets in effect at effective date of acquisition. • For a given payment date, if a PSA rate is in effect for an account depending on PSA, it

is used. If a PSA is not in effect, a PSA of zero is used. • Similarly for a given payment date, if a CPR rate is in effect for an account depending

on CPR, it is used. If a CPR is not in effect, a CPR of zero is used. Projected Cash flows are calculated using the following formula: Payment = p*(i/100)/[q*(1-[1+((i/100)/q)]^-n)] Where, i = Stated annual interest rate (as a percentage) p = Principal loan amount (i.e. shares/par) n = Term of loan (i.e. number of payment periods remaining) q = Number of payments per year For example, a quarterly paying security with a 10.00% stated annual interest percentage rate has 10 payment periods remaining to maturity at the time the security is acquired, where the principal amount (i.e. par amount on the acquisition) is 100,000.00. Based on the payment formula, the contractual payment was computed as:

100,000.00 * ( 10.00 / 100 ) / [ 4 * ( 1 - [ 1 + ( ( 10.00 / 100 ) / 4 ) ] ^ - 10 ) ]

= 11, 425.88

If after the third payment is received there have been no prepayments to have occurred to date, a principal balance of 72,547.35 remains and 7 periods remain until maturity. Based on the contractual payment formula, the contractual payment on the remaining principal amount is unchanged, as follows:



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72,547.35 * ( 10.00 / 100 ) / [ 4 * ( 1 - [ 1 + ( ( 10.00 / 100 ) / 4 ) ] ^ - 7 ) ] = 11, 425.88

However, if the third payment includes a prepayment such that a principal balance of only 57,694.78 remains after the payment (including prepayment) has been applied, the contractual payment formula (left unadjusted) no longer supports what the contractual payment on the remaining principal balance would have been had the prepayment not occurred:

57,694.78 * ( 10.00 / 100 ) / [ 4 * ( 1 - [ 1 + ( ( 10.00 / 100 ) / 4 ) ] ^ - 7 ) ]

= 9,086.66

For FAS91 methods 1 and 2 this will be the new projected payment and a new yield is calculated as if the prepayment was known at acquisition. For FAS91 method 3, this will also be the new projected payment but the yield will remain as it was at acquisition. For FAS91 method 4, the value for ‘n’ in the payment formula (‘7’ as seen in the example above) is therefore adjusted to 5.465042 such that the contractual payment formula continues to support what the contractual payment would have been had the prepayment not occurred:

57,694.78 * ( 10.00 / 100 ) / [ 4 * ( 1 - [ 1 + ( ( 10.00 / 100 ) / 4 ) ] ^ - 5.465042 ) ]

= 11,425.88

The target redemption date used internally for the price from yield and yield from price calculations on which amortization (accrued and sold) is based on and after the effective date of the prepayment is also adjusted. It is initially adjusted to the closest contractual payment date equal to or greater than the date arrived at by adding the new value for ‘n’ to the number of periods remaining from the payment date for which the prepayment occurred. In the example, the maturity date would then initially be perceived as being 6 periods out, as opposed to either the 5.465042 periods used in the contractual payment calculation above or the 7 periods actually remaining to the maturity date. If remaining payments occur exactly according to the new schedule, the remaining balance will be paid down in full over the remaining 6 periods. However, if and when additional prepayments occur, the process of applying the yield in effect prior to the prepayment to the par remaining after the prepayment and deriving the value for ‘n’ in the contractual payment formula such that the resulting payment is equal to what it would have been had the prepayment not occurred is repeated, and amortization resumes accordingly. Notes:

1. Where Issue Date is present and is used in FAS91 amortization processing, exceeding 60 years from Issue Date to Maturity Date will yield unpredictable FAS91 amortization results, while staying within the 60 year limit will yield predictable results. Where Issue Date is not present or is present but is not used in FAS91 amortization processing, exceeding 60 years from Contractual Settle Date of acquisition to Maturity Date will yield unpredictable FAS91 amortization results, while staying within the 60 year limit will yield predictable results. The 60 year limitation is imposed via an internal table of cash flows constructed for purposes of computing the effective yield on which FAS91 compliant effective interest methods of amortization are based. The yield is computed



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using SIA Formula 2 Modified for Clean Price as documented in Section 8.70 of the InvestOne System Manual.

2. Assuming monthly payments, the GNMA Pool Balance/Factor Master File (the data from which may be viewed via the VSPB screen) holds up to 50 years worth of paydown history for a given security. The current assumption is that 60-year mortgage related securities are not expected to be held for more than 50 years, such that the GNMA Pool Balance/Factor Master File is sufficient to hold historical paydown data required for FAS91 processing as described in this section. Holding monthly paying 60-year mortgage related security for more than 50 years will yield unpredictable FAS91 amortization results.

14.2 ANTICIPATED PREPAYMENTS: DEPP (MORTGAGE BACKED PREPAYMENT RATES) SCREEN

The DEPP (Mortgage Backed Prepayment Rates) Screen provides, for a given security and Effective Date, the ability to add, change, or delete a prepayment speed assumption (PSA) or constant prepayment rate (CPR) per screen request. The screen operates in ADD, CHANGE and VIEW modes, where ADD or CHANGE mode is required to maintain a rate. ADD and CHANGE modes provide identical functionality in that either mode allows add, change, or delete of one rate per screen request.

The screen may also be used in any of its valid modes to view up to 12 PSAs or CPRs already on file (for the requested security) depending on the TYPE entered. The rates are displayed in descending order by Effective Date, starting with the Effective Date entered.

Today's PSA or CPR is used to compute projected prepayments associated with Contractual Principal Payment Dates that are equal to or greater than today in computing accrued amortization at today's valuation date. This is true even if additional rates having effective dates greater than today are already on file. • If a pool balance or published factor (depending on the account's requirements) is not yet

on file for that payment date, the PSA or CPR in effect at the prior contractual payment date relative to today is used to compute the projected prepayment associated with that contractual principal payment date in computing accrued amortization at today's valuation date.

• If a pool balance or published factor (depending on the account's requirements) is on file for that payment date, it is used to derive what the entire principal payment (including prepayment) for that payment date actually was in computing accrued amortization at today's valuation date, rather than using a PSA or CPR.

For all earlier contractual payment dates, only pool balances or published factors (depending on the account's requirements) on file are used to derive what the entire principal payments (including prepayments) for the corresponding payment dates actually were in computing accrued amortization at today's valuation date, rather than using PSAs or CPRs. Given principal payments and prepayments derived from pool balances/factors and/or CPRs/PSAs, interest



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payments are computed as required to complete the cash flow inputs required for amortization results. Anticipated Prepayment rates entered on DEPP are only used in calculating FAS91 compliant amortization for positions that are held in accounts where the FAS91 setting on AAAD is 1 or 2. CPRs and PSAs are ignored for positions that are held in accounts where FAS91 is 3 or 4.



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NEXT DEPP MODE ADD FDMP533 MORTGAGE BACKED PREPAYMENT RATES SECURITY NO: FNMA301 FNMA301 SWP=> 1 EFFECTIVE DATE: 12 31 07 TYPE: C CPR RATE: 0.0000 DATE CPR RATE ________ ___________ 08 11 06 8.7500 08 10 06 8.6250 07 10 06 7.5000 06 01 06 9.0000 02 01 06 6.0000

Field Description. Fields shaded gray are required.

SECURITY NO. Security Number, including date and qualifier. (Security short name is displayed). The security number must have Asset Group “G1”, “G2”, “FH”, “FM”, or “MR” coupled with Accrual Method “A”, “D”, “E”, “F”, “H”, “R”, or “Q”.

SWP This field allows the user to designate how this database update should be processed. 0 or N- Do not Sweep or Translate the affected position(s). 1 or Y- Sweep but do not Translate the affected position(s). The Translation Date is

re-set if the account is global. Default. 2 or X - Sweep and Translate the affected position(s). 3 or H - Invoke Hierarchical Valuations.

EFFECTIVE DATE Effective date of the PSA or CPR rate.

TYPE Rate Type. Controls whether the rate being maintained is a PSA or CPR. C – CPR (Constant Prepayment Rate). P – PSA (Prepayment Speed Assumption).

CPR or PSA RATE The CPR or PSA rate (percentage implied) to be applied to payments projected to contractually occur on and after the EFFECTIVE DATE. • The RATE field is labeled CPR or PSA based on the TYPE specified. • RATE can be changed. Changed or deleted, given valid entries in the SECURITY NUMBER, EFFECTIVE DATE, and TYPE fields.



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14.3 PAYDOWNS The effective interest method of amortization results in the discount or premium to each future cash flow being fully amortized at each respective cash flow date. If no prepayments occur, or if all prepayments occur exactly as they were expected to occur (based on the CPRs or PSAs used to project those prepayments historically), then there is no difference between amortization accrued toward a particular principal paydown date and amortization relieved by the principal paydown transaction generated for that paydown date, as long as the transaction generated does “pro-rata” cost relief when multiple taxlots make up the position. If unexpected prepayments do occur (based on the CPRs or PSAs used to project those prepayments historically), then there is a difference between amortization accrued toward a particular principal paydown date, and amortization relieved by the principal paydown transaction generated for that paydown date, as long as the paydown transaction generated is a “no gain/loss” paydown. To apply principal paydowns or payups across multiple taxlots in a manner consistent with the principal paydown/payup assumptions known to the Effective Interest Method of amortization, only “pro-rata, no gain/loss” paydowns or payups are generated for MBS securities in accounts electing FAS91 compliance per AAAD FAS91 option. If specified on the MDGG/MDSG Generation Rules Screens, paydown or payup tran codes allowing non-pro-rata cost relief or realized gain/loss are substituted with otherwise equivalent “pro-rata, no gain/loss” tran codes when the rules are used to generate transactions for MBS securities in accounts electing FAS91 compliance per AAAD FAS91 option. Substitutions are as follows:

MDGG/MDSG Tran Code Substitute Tran Code Class Code PAYDWA PPAYDA PDWA

PAYDWN PPAYDA PDWN

PPAYDN PPAYDA PDWN

MBSPDA MBSPPA RPWA

SPDWN SPPDWA PDOP

SPPDWN SPPDWA PDOP

PAYUP PYUP PYP

SPAYUP SPYUP SPYP



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15 AMORTIZATION METHODS FOR VARIABLE AND FLOATING RATE BONDS The yield based amortization methods for variable and floating rate bonds account for interest rate changes in three variations. Static methods Investment Accounting (InvestOne) uses the interest rate in effect as of contractual settlement

date of acquisition to calculate a single yield to be kept constant over the life of a given taxlot. The yield is not recalculated (nor are amortization dependant accounting effects recalculated) to take into account changes in the stated interest rate over time.

Retrospective methods As with existing methods, the first interest rate needed for the retrospective methods is the one

in effect at the contractual settle date of acquisition. Each interest rate change having an effective date greater than contractual settle date of acquisition results in the need to recalculate the cost yield to redemption, and to restate amortization results from the greater of effective date of interest rate and the day after account verification date, through account balance date (including both dates) to reflect the new cost yield as though it had been in effect since contractual settle date of acquisition.

Prospective methods As with existing methods, the first interest rate needed for the prospective methods is the one in

effect at the contractual settle date of acquisition. Each interest rate change having an effective date greater than contractual settle date of acquisition results in the need to retain the amortized cost balance as of the day prior to the effective date of the interest rate change, to calculate an amortized cost yield (that is, “book yield”) to redemption to support the amortized cost value before the rate change, and to restate amortization results from the greater of effective date of interest rate and the day after account verification date, through account balance date (including both dates) to reflect the new book yield.

Account Settings The method an account uses for scientific and level yield amortization/accretion of variable or floating interest rate bonds is controlled by the A/A YLD field on AAAD.

NEXT AAAD MODE CHANGE FDMP03 * * * ACCOUNT DEFINITION * * * ACCOUNT NO.......... 000000009203100 SHORT NAME THE BALANCED FUND MODEL ACCOUNT NO.... REPORTING PRIORITY CODE............ STATUS...E A STATUS DATE....06 30 94 RPT-ACC NO: INCEPTION.................. 12 31 91 VERIFICATION................ 05 31 94 BALANCE.................... 06 30 94 SCHEDULE.................... 06 30 94 POSN LEVEL PRICING ACT DATE 00 00 00 DATA SOURCE. M FISCAL YEAR END. 12 POSITION TOLERANCE (SHRS)..... 0.00 TAX METHOD..... H TAXLOT CODE.... INCOME PROCESSING CODE.. D FAS91.. ADVISOR ACCOUNTING................ PRICING PROCESSING CODE........... Z COST ASSIGN... F TRADE OVER.... GNMA GEN... N WASH SALE ADJ GEN... ACCOUNT TYPE...................... TRAN GENERATION.. LAG DAYS... 0000 TRAN GENERATOR "TO-DATE".... FUND CATEGORY. FUND GROUP. OLDEST EFFT DATE CAPTURED... AMORT/ACCRET METHOD 6 DE MINIMUS N GAIN/LOSS CODE FOR AMORT/ACCRET.... 1 ACCR METHODS T/NT ACCR INC OPT TAXLOT FOR ACCR T/N. ACCT INDICATOR. G/L PROFILE... GROUP ACCOUNT NO.... 000000000000000 AMORT TO CALL.. BOUNDARIES.... 0 OVERRIDE FUTURES SCTY G/L TREATMENT AMORT OPTION... 1 AMORT SHORT... PROJ TAX RATE.. ADJUST INC CODE.. N OID. 0 MOD YTM. 0 POINT OF SALE. N TAX GROUP...... E CONFIRM DEFAULT.. C TEST AC. ALT SS PROC. N A/A YLD. CALENDAR...... CORP-ACT PROCESS. N



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Field Description. Fields shaded gray are required. A/A YLD Blank - Static interest rate method (default). Where scientific or level-yield

amortization/accretion is calculated on a variable/floating rate bond for a given taxlot. With this method, the interest rate in effect at the contractual settle date of acquisition is used over the entire life of the taxlot, and amortization/accretion is otherwise computed as though the bond were a fixed income bond.

R - Retrospective method. Where scientific or level-yield amortization/accretion is calculated on a variable/floating rate bond for a given taxlot. With this method, the interest rate in effect at the contractual settle date of acquisition is used to calculate the initial cost yield. Stated interest rate changes effective after contractual settle date of acquisition result in a new cost yield being computed and amortization/accretion being restated only on and after the effective date of the interest rate change based on the new cost yield, with accounting effects taken only in open periods as though the new interest rate had always been in effect. Amortization/accretion is otherwise computed as though the bond were a fixed income bond.

P - Prospective method. Where scientific or level-yield amortization/accretion is calculated on a variable/floating rate bond for a given taxlot. With this method, the interest rate in effect at the contractual settle date of acquisition is used to calculate the initial cost yield. Stated interest rate changes effective after contractual settle date of acquisition result in a new book yield being computed, and amortization/accretion being restated only on and after the effective date of the interest rate change based on the new book yield, with accounting effects taken only in open periods. Amortization/accretion is otherwise computed as though the bond were a fixed income bond.

SECURITY SETTINGS In order to use one of the methods for amortizing variable and floating rate bonds, the security must qualify for scientific or level yield amortization. This is determined by the AMORT/ACCRET field as seen on the Security Definition Bond (BOSB) Screen. The security must be set up to use one of the variable or floating rate interest accrual methods, also on BOSB.

Field Description. Fields shaded gray are required. AMORT/ACCRET S - For accounts with scientific, level-yield, installment (NPV) and catch-up amort/accret,

this security qualifies for scientific amort/accret; for accounts with only straight-line and installment (NPV) amort/accret, this security qualifies for straight-line amort/accret.

L - For accounts with scientific, level-yield, installment (NPV) and catch-up amort/accret, this security qualifies for level-yield amort/accret; for accounts with only straight-line and installment (NPV) amort/accret, this security qualifies for straight-line amort/accret.

ACCR METH V - Variable rate (actual days), closing position. W - Variable rate (actual days), opening position. E - Floating rate (30/360). F - Floating rate (actual/actual).



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15.1 INTEREST RATE BOUNDARIES This chart illustrates the position date at which a variable or floating interest rate (as seen on DECR) affects the calculation of amortization accrued at the taxlot level:

01/01

01/02

01/03

01/04

01/05

Last Rate Used for

AMORT ACCRUED DECR rate EFFT DATE: 01/01 01/04 DECR (Annual) RATE: 7.25 8.50 Annual Rate in Effect: 7.25 7.25 7.25 8.50 8.50 POSITION DATE: 01/01 7.25 POSITION DATE: 01/02 7.25 POSITION DATE: 01/03 7.25 POSITION DATE: 01/04 8.50 POSITION DATE: 01/05 8.50

• For retrospective, the interest rate used to compute amortization accrued as of a given

position date is the one in effect at that date when the accounting effects of the accrual are committed to file.

• For prospective, the last interest rate used to compute amortization accrued as of a given position date is the one in effect at that date when the accounting effects of the accrual are committed to file.

This chart shows whether a given variable or floating interest rate (as seen on DECR) affects the calculation of amortization sold at the taxlot level for a given disposition transaction:

01/01 01/02 01/03 01/04 01/05

Last Rate Used for

AMORT SOLD DECR rate EFFT DATE 01/01 01/04 DECR (Annual) Rate 7.25 8.50 Annual Rate in Effect 7.25 7.25 7.25 8.50 8.50 BUY E=CS Disposition #1 E=CS 7.25 Disposition #2 E=CS 7.25 Disposition #3 E=CS 8.50 Disposition #4 E CS 7.25 Disposition #5 E CS 7.25 Disposition #6 E CS * Disposition #7 CS E 7.25 Disposition #8 CS E 7.25 Disposition #9 CS E 7.25

E - The effective date of the disposition. CS - The contractual settle date of the disposition. *For disposition #6, the last rate used for amortization sold depends on whether or not the 01/04 rate is on file when the disposition transaction effective date is processed or reprocessed through Inventory. If the 01/04 rate is not on file when the disposition transaction is entered or reprocessed through Inventory, then the 01/03 rate is the last rate used.



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• For retrospective, the rate used to compute amortization sold is the one in effect at the lesser of effective date and the day prior to the contractual settle date of the disposition transaction when the transaction's accounting effects are committed to file.

• For prospective, the last rate used to compute amortization sold is the one in effect at the lesser of effective date and the day prior to the contractual settle date of the disposition transaction when the transaction's accounting effects are committed to file.

PROSPECTIVE AMORTIZATION BATCH CONVERSION The Prospective Amortization Batch Conversion process is used to convert an account's scientific or level-yield amortization/accretion on a variable/floating rate security for a given taxlot, to a prospective method. The process is also used if the account is already using the prospective method and any changes to the Account Level Master Definition (AAAD) influencing amortization/accretion or any changes to the amortization at the Asset Group level are made. A conversion is NOT needed if: • An account is open from inception (that is, if AAAD verification date is equal to inception

date) when it elects to “turn on” prospective amortization by changing the AAAD A/A YLD field to “P” or

• An account is open from inception when the account has already elected the prospective method and other account level master definition changes influencing amortization are made on AAAD/AAGO.

If these conditions exist, the account's oldest Effective Date captured (as seen on AAAD) is set back to the day after Verification Date, so that a subsequent resweep of the account (or retranslate, if the account is global) is required in order for amortization results in all accounting periods to be recomputed. A conversion IS needed if: • An account is not open from inception (that is, if AAAD Verification Date is greater than

inception date) when it elects to “turn on” prospective amortization by changing the AAAD A/A YLD field to “P”. Or

• An account is not open from inception, when the account has already elected the prospective method and other account level master definition changes influencing amortization are made on AAAD/AAGO.

This conversion process must then be run to convert accrual balances in open periods. Then they will reflect true prospective results, as though the account was processed using prospective, or using prospective with current account level master definition characteristics all along.

The Prospective Amortization Batch Conversion is performed as part of the Batch Sweep function, with parameter 56 set to “Y”.



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ACCOUNT DEFINITION When changing the account to use the prospective method (A/A YLD on AAAD to “P” or A/A YLD to “R” when the FAS91 is “1” or “2”): if the Verification Date does not equal Inception Date, the account must run the Prospective Amortization Batch Conversion to convert any accrual balances in an open period. When changing this on the Account Definition (AAAD) Screen, a message displays: "PENDING CHANGES SUBMITTED FOR A CONVERSION, VIEW PENDING CHANGES ON AAPC, RECORD CHANGED". Pending values can be viewed on AAAD in CHANGE Mode and also on the Account Definition Pending Changes (AAPC) screen. These changes keep their “pending” status until the Prospective Amortization Batch Conversion is run through Batch Sweep with Parameter 56 set to “Y”. Changes to any of the following fields when the account is using the prospective method (and the Verification Date is not equal to Inception Date) causes the system to flag the account as being in need of conversion at the time the change is performed:

AAAD Screen Fields A/A METH BOUNDARIES DE MIN AMORT SHORT ACCR METHODS OID T/NT MOD YTM AMORT TO CALL POINT OF SALE

ASSET GROUP OVERRIDE If the account is using the prospective method (A/A YLD on AAAD to “P” or A/A YLD to “R” when the FAS91 is “1” or “2”), and the verification date is not equal to inception date, any changes to the following fields on the Asset Group Override (AAGO) screen require a Prospective Amortization Batch Conversion. AAGO Screen Fields Amortization Methods Amortization to Call De Minimus Boundaries

If a Cost Assignment Conversion is required, this must be run to successful completion before the Prospective Amortization Batch Conversion. If the Prospective Amortization Batch Conversion is run before the Cost Assignment Conversion, an error is displayed/the job is unsuccessful.

15.2 ACCOUNT DEFINITION PENDING CHANGES The AAPC Account Definition Pending Changes Screen is a display-only screen. The Active Parameters display what is active on the AAAD in VIEW mode. The Override Parameters display any changes pending on AAAD through message(s) on the bottom of the screen, and in CHANGE mode. If there are any changes pending on AAPC, a prospective amortization batch conversion must be run through the Batch Sweep process. When a conversion is successfully completed, the pending status of the changes is cleared, and they become active. Until active, pending changes do not effect processing. Returning all pending changes back to their current active values eliminates the conversion request. However, once a pending update becomes active, only another conversion can bring you back to where you started. If there are no changes pending for an account, a message at the bottom of the screen displays: "NO CHANGES ARE PENDING FOR THIS ACCOUNT".



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AAPC Screen

NEXT AAPC MODE VIEW FDMP532 ACCOUNT DEFINITION PENDING CHANGES ACCOUNT NO.. 000000000000063 HIGH YIELD FUND STATUS: STATUS DATE: PENDING PARAMETERS: ACTIVE PARAMETERS: --------------------------- --------------------------- A/A METH................. 6 DE MIN................... N ACCR METHODS............. T/NT..................... N AMORT TO CALL............ 1 CHANGE PENDING 0 BOUNDARIES............... 1 CHANGE PENDING 0 AMORT SHORT.............. OID...................... 3 CHANGE PENDING 1 MOD YTM.................. 0 POINT OF SALE............ N A/A YLD.................. P CHANGE PENDING FAS91....................

Field Description. Fields Shaded Gray are Required. ACCOUNT NO: A valid account number is entered.

ACCOUNT SHORT DESC. The account short description is displayed.

STATUS If a change is pending, displays change pending status.

STATUS DATE: The date the changes went into pending status.

PENDING PARAMETERS Displays what the account definition is changing to. Blank means there is no Pending Parameter for that field.

A/A METH Displays pending values for Amortization/Accretion Methods.

DE MINIMUS Displays pending values for De Minimus.

ACCRUAL METHODS Displays pending values for Accrual Methods.

T/NT Displays pending values for T/NT.

AMORT TO CALL Displays pending values for Amortization To Call.

OID Displays pending values for Original Issue Discount processing.

MOD YTM Displays pending values for Modified YTM.

POINT OF SALE Displays pending values for Point of Sale processing.

A/A YLD Displays pending values for Amortization/Accretion Yield.

FAS91 Displays pending values for FAS91.

ACTIVE PARAMETERS Displays what the account is currently using and if there are any CHANGES PENDING.



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PROSPECTIVE AMORTIZATION BATCH CONVERSION When changing a field that requires a Prospective Amortization Batch Conversion on AAAD or AAGO, the field is in “Override Pending” status. Once this occurs, the “BQ” file is created with a status of “1” for the specified Asset Group (BQ-A) or a specific account (BQ-B). When batch sweep is run with parameter 56 set to “Y”, it picks up any records on the “BQ” file with a status of “1” if the cost assignment conversion is not required. Once the Prospective Amortization Batch Conversion is successfully completed, the status on the “BQ” file changes from “1” to “3”.

STATUS “3” A Status “3” on the “BQ” file means that the job ran successfully and that the specified Asset Group or account has been converted. • If this occurs for a specific Asset Group, the Account/Asset Group Override (AAGO) Screen

displays “Override in Place” for the specified Asset Group and the “AO” file is updated with the override.

• If this occurs for a specific account, the Account Definition Pending Changes (AAPC) Screen clears any “Changes Pending” and all is active.

The Prospective Amortization Batch Conversion is processed through Batch Sweep, with parameter 56 set to a “Y”. If parameter 56 is set to “Y”, the following statements are true: • This can be run by either specifying a specific account or by running all accounts. • Only accounts that have “Changes Pending” (Records on the “BQ” file with a status of “1”)

are converted. • Only accounts that are being converted are swept from Verification Date to the Balance

Date. If the “all accounts” option is selected, only those accounts needing a conversion are swept.

• All Dates are ignored in the JCL. • The verification date does NOT move forward on any account. • After a successful run, the Prospective Conversion Date on AAUV is set to the account's

Verification Date. The Prospective Conversion Date cannot be less than the Verification Date unless the account no longer uses the prospective method.

If the Prospective Amortization Batch Conversion job is successful, there is a message in the Batch Inventory Sweep Log to indicate that the Prospective Conversion was completed and successful.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION CONVERSION, REPORTS AND AMORTIZATION/ACCRETION DECISION CHARTS


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16 CONVERSION, REPORTS AND AMORTIZATION/ACCRETION DECISION CHARTS

With the Account Definition and Security Definition changes previously addressed having been made, a fund being newly converted onto Investment Accounting (InvestOne) (that is, master definitions having been set up but no activity yet entered) will reflect the desired amort/accret once activity has commenced. Amortization/accretion accrued, earned and sold and effects on the fund's earnings, market value, etc. can be verified through a number of online and batch reports. The specific reports involved are further discussed in the next section. The conversion of an existing Investment Accounting (InvestOne) account from non-amortizing to amortizing (or vice versa) or from one method of amort/accret to another requires that certain ramifications of the conversion first be considered:

• The verification date of an account prevents amort/accret from being calculated or re-calculated on or prior to this date. Therefore, if purchases of amortizing securities in an amortizing account occurred on or prior to verification date and prior to the account and security having been defined as qualifying for amort/accret, the effects of amort/accret will not be seen until the valuation/position date after verification date. Similarly, if an account is converted from straight-line to scientific amort/accret (or vice versa), and/or from amort only to accret only (or vice versa) and/or from amortizing to maturity to amortizing to call/ put (or vice versa), the effects of the conversion will not be seen until the valuation/position date after verification date.

• Straight-line amort/accret begins on trade date, day after trade date, or contractual

settle date of purchase (according to AMORT OPTION as seen on the Account Definition (AAAD) screen). Scientific and level-yield amort/ accret begin on settle date of purchase. If a purchase were to trade on or before verification date and settle after verification date, a conversion from straight-line based on trade date to scientific, level-yield or catch-up would result in straight-line accrual up to and including verification date, no accrual from verification date up to settle date and scientific, level-yield or catch-up accrual on and beyond settle date.

• In a taxlot account, any of the aforementioned conversions to amort/accret would

result in accrued amort/accret after verification date calculated as though the account had always had the amort/accret method (and related processing options) to which it just converted. In the case of converting from no amort/accret to any method of amort/accret, the result is that the amort/accret which would have been accrued and earned over the period of time from purchase date to the position date immediately following verification date (had the account been amortizing all along) is accrued and earned in the valuation period from verification date to the next valuation/position date. This concentrated amount of earned amortization will ultimately impact the account's net investment income, gain/loss, and (for securities priced at book) market value. Similarly, the resulting impact on earned amortization of related conversions (that is, from straight-line to scientific, amort only to accret only) is seen in the period from verification date to the next valuation/position date.

• In an average cost account, a conversion to amort/accret requires that in order to achieve the “concentrated amount” of earned amortization in the valuation period from verification date to the next valuation/position date (as described above for taxlot accounts), the user must manually “plug” the accrued AMORT/ ACCRET amount (through the Holdings Definition (DAHO) screen in CHANGE mode) as of the position date immediately after verification date.



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• In the event of converting to amort to call option “2” (best yielding call) or “3”

(worst yielding call), the first best/worst entry to be saved on the taxlot will be the first one required for calculation of amortization accrued or sold effective within or beyond the conversion period. However, the analysis having taken place to arrive at the first best/worst entry to be saved will have begun from acquisition date, such that the resulting historical path of best/worst calls leading up to the resulting accrued amortization at conversion date is the same as what it would have been had the account elected to do best/worst processing since its inception.

• When chosen for bonds having variable or floating rate accrual methods, scientific or

level-yield amortization results are only possible when a taxlot INTEREST RATE (as seen on the Tax Lot View (VSTV) screen) is available. Taxlot interest rates are only made available for taxlots established or re-established for bonds for which accrual methods “V”, “W”, “E” or “F” have been elected in conjunction with the election of AMORTIZATION/ACCRETION “S” or “L”, as seen on the BOSB Screen.

A taxlot is established or re-established when its effective date is processed or reprocessed in Inventory. The taxlot interest rate is calculated by annualizing the variable or floating interest rate in effect at the taxlot contractual settle date per the ANNUAL RATE TYPE seen on the BOSB Screen. If scientific or level-yield amortization/accretion is desired on a taxlot of a bond having a variable or floating rate accrual method and having been established in a closed accounting period, the taxlot must be free-delivered off and free-received back on in order to establish a new taxlot in an open accounting period. The FDEL and FREC transaction codes, respectively, may be used for this purpose. Other account and security characteristics then dictate the specific amortization/accretion results seen for the taxlot. Where the result is either scientific or level-yield amortization/accretion, the taxlot interest rate is used as though it were a fixed interest rate, and the bond accrual method is treated as though it were “A”- fixed rate coupon bond (actual/actual) - for all amortization/accretion calculations made over the life of the taxlot (for as long as other account and security characteristics dictate that the taxlot qualifies for scientific or level-yield amortization/accretion). In the event there is no variable or floating interest rate in effect when a given taxlot is established or re-established, a CS DATE RATE NOT FOUND message identifying the memo number of the taxlot for which the missing rate was detected is issued by Inventory. This provides the client with an opportunity to research and enter the missing rate while the taxlot effective date is still in an open accounting period. A missing rate condition is otherwise treated as though the bond has a zero interest rate for purposes of calculating scientific or level-yield amortization/accretion, as applicable.

With the above considerations in mind and account and security definition variables addressed, the final conversion steps are to set the account's verification date to protect account balance and position date as desired. Then, resweep the account from verification date forward by requesting the Account Initialization (AAIN) screen in CHANGE mode for the account to be converted, changing the *NEXT CYCLE* Balance From Date to be equal to the account's verification date and <ENTER>. The resweeping process causes amort/accret to be computed for open valuation periods. For more graphic representations of amortization/accretion decision-making processes, see the Amortization/Accretion Decision Charts found later in this section.



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16.1 REPORTS As an aid in verifying the results of a conversion involving amortization/accretion, the following is a list of key online and batch reports in which amortization/accretion is involved: Investment Accounting (InvestOne) Online

Reports Investment Accounting (InvestOne) Batch

Reports Report Title Screen ID Report Title Report ID Account Valuation Balances AAVB Amortization/Accretion by State R062

Fixed Income Maturity Schedule FIMS Detail of Earned Amortization/Accretion R223

Investment Summary INVS Earned Amortization/Accretion R083

Security Exposure SECEXP Schedule of Investments R066

Statement of Assets and Liabilities STAL Schedule of Investments (Taxlot Level) R082

Taxlot View VSTV Statement of Assets and Liabilities R065

Taxlot Holdings View VSTH Summary of Net Assets R059

Unit Income and Unit Valuation UNUV Unit Income and Unit Valuation R064

Unrealized Gain/Loss Report R060

Investment Accounting (InvestOne) – Mutual Fund Online Reports

Investment Accounting (InvestOne) – Mutual Fund Batch Reports

Report Title Screen ID Report Title Report ID Equity Balances EQUITY Investment Income Detail R072

Income/Gain(Loss) INGL Investment Income Summary R070

Statement of Assets and Liabilities STAS Investment Restriction Reports R018

Maturity Range Cross Tabulation R017

Net Asset Value Reconciliation R019

Per-share Income and Capital Changes R020

Weekly Fund Activity Summary R012

Summary of Realized Gains/Losses R013

Statement of Assets and Liabilities R089

Statement of Change in Net Assets R088

Statement of Operations R076

Unit Investment Income R071

General Ledger Online Reports General Ledger Batch Reports

Report Title Screen ID Report Title Report ID General Ledger Transaction Inquiry GLIN General Ledger Detail Transaction Listing R078

General Ledger Summary Listing R079 For detailed information regarding these and other reports, see Section 3, Report Formats.



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16.2 ACCRUAL METHODS B, C, T AND N FOR PRICE CODE 'S' Accrual Methods B (CD (Actual/365)), C (CD (Actual/360)), T (Discount Note (30/360)) and N (Discount Note (Actual/Actual)) have the following limitations when the bond uses Price Code ‘S’.

1. Maturity Price must be 1.0000 for purposes of maturity transactions generated by the Transaction Generator;

2. Effective Maturity Price must be 1.0000 in combination with Scientific Amortization/Accretion method;

3. Level Yield amortization is not supported.

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION AMORTIZATION/ACCRETION DECISION CHARTS


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17 AMORTIZATION/ACCRETION DECISION CHARTS

17.1 GENERAL AMORTIZATION/ACCRETION DECISIONS In general, the Account Definition (AAAD) screen AMORT/ACCRET METHOD and AMORT OPTION field values, coupled with the Security Definition (BOBD) FEDERAL TAX STATUS and BOSB Screen AMORTIZATION/ ACCRETION field values determine the resulting amortization/accretion on a given purchase, summarized on the following chart: *(T) = AMORT/ACCRET BEGINS ON TRADE DATE OF PURCHASE (T+1) = AMORT/ACCRET BEGINS ON DAY AFTER TRADE DATE OF PURCHASE (CS) = AMORT/ACCRET BEGINS ON CONTRACTUAL SETTLE DATE OF PURCHASE

AAAD AMORT METH

AAAD AMORT OPTION

BOBD TAX

STATUS

BOSB AMORT/ ACCRET RESULT*

(ANY) (ANY) (ANY) N NO AMORT/ACCRET 0 (ANY) (ANY) (ANY) NO AMORT/ACCRET 1 BLANK (ANY) Y,S,L,C STRAIGHT-LINE AMORT ONLY (T+1) 1 1 (ANY) Y,S,L,C STRAIGHT-LINE AMORT ONLY (T) 1 2 (ANY) Y,S,L,C STRAIGHT-LINE AMORT ONLY (CS) 1 (ANY) (ANY) I INSTALLMENT (NPV) AMORT ONLY (CS) 2 BLANK (ANY) Y,S,L,C STRAIGHT-LINE ACCRET ONLY (T+1) 2 1 (ANY) Y,S,L,C STRAIGHT-LINE ACCRET ONLY (T) 2 2 (ANY) Y,S,L,C STRAIGHT-LINE ACCRET ONLY (CS) 2 (ANY) (ANY) I INSTALLMENT (NPV) ACCRET ONLY (CS) 3 BLANK (ANY) Y,S,L,C STRAIGHT-LINE AMORT/ACCRET (T+1) 3 1 (ANY) Y,S,L,C STRAIGHT-LINE AMORT/ACCRET (T) 3 2 (ANY) Y,S,L,C STRAIGHT-LINE AMORT/ACCRET (CS) 3 (ANY) (ANY) I INSTALLMENT (NPV) AMORT/ACCRET (CS) 4 BLANK (ANY) Y STRAIGHT-LINE AMORT ONLY (T+1) 4 1 (ANY) Y STRAIGHT-LINE AMORT ONLY (T) 4 2 (ANY) Y STRAIGHT-LINE AMORT ONLY (CS) 4 (ANY) (ANY) S SCIENTIFIC AMORT ONLY (CS) 4 (ANY) (ANY) L LEVEL-YIELD AMORT ONLY (CS) 4 (ANY) (ANY) C CATCH-UP AMORT ONLY (CS) 4 (ANY) (ANY) I INSTALLMENT (NPV) AMORT ONLY (CS) 5 BLANK (ANY) Y STRAIGHT-LINE ACCRET ONLY (T+1) 5 1 (ANY) Y STRAIGHT-LINE ACCRET ONLY (T) 5 2 (ANY) Y STRAIGHT-LINE ACCRET ONLY (CS) 5 (ANY) (ANY) S SCIENTIFIC ACCRET ONLY (CS) 5 (ANY) (ANY) L LEVEL-YIELD ACCRET ONLY (CS) 5 (ANY) (ANY) C CATCH-UP ACCRET ONLY (CS)



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AAAD AMORT METH

AAAD AMORT OPTION

BOBD TAX

STATUS

BOSB AMORT/ ACCRET RESULT*

5 (ANY) (ANY) I INSTALLMENT (NPV) ACCRET ONLY (CS) 6 BLANK (ANY) Y STRAIGHT-LINE AMORT/ACCRET (T+1) 6 1 (ANY) Y STRAIGHT-LINE AMORT/ACCRET (T) 6 2 (ANY) Y STRAIGHT-LINE AMORT/ACCRET (CS) 6 (ANY) (ANY) S SCIENTIFIC AMORT/ACCRET (CS) 6 (ANY) (ANY) L LEVEL-YIELD AMORT/ACCRET (CS) 6 (ANY) (ANY) C CATCH-UP AMORT/ACCRET (CS) 6 (ANY) (ANY) I INSTALLMENT (NPV) AMORT/ACCRET (CS) 7 BLANK A,E Y,S,L,C STRAIGHT-LINE AMORT ONLY (T+1) 7 BLANK T Y,S,L,C STRAIGHT-LINE ACCRET ONLY (T+1) 7 1 A,E Y,S,L,C STRAIGHT-LINE AMORT ONLY (T) 7 1 T Y,S,L,C STRAIGHT-LINE ACCRET ONLY (T) 7 2 A,E Y,S,L,C STRAIGHT-LINE AMORT ONLY (CS) 7 2 T Y,S,L,C STRAIGHT-LINE ACCRET ONLY (CS) 7 (ANY) A,E I INSTALLMENT (NPV) AMORT ONLY (CS) 7 (ANY) T I INSTALLMENT (NPV) ACCRET ONLY (CS) 8 BLANK A,E Y STRAIGHT-LINE AMORT ONLY (T+1) 8 BLANK T Y STRAIGHT-LINE ACCRET ONLY (T+1) 8 1 A,E Y STRAIGHT-LINE AMORT ONLY (T) 8 1 T Y STRAIGHT-LINE ACCRET ONLY (T) 8 2 A,E Y STRAIGHT-LINE AMORT ONLY (CS) 8 2 T Y STRAIGHT-LINE ACCRET ONLY (CS) 8 (ANY) A,E S SCIENTIFIC AMORT ONLY (CS) 8 (ANY) T S SCIENTIFIC ACCRET ONLY (CS) 8 (ANY) A,E L LEVEL-YIELD AMORT ONLY (CS) 8 (ANY) T L LEVEL-YIELD ACCRET ONLY (CS) 8 (ANY) A,E C CATCH-UP AMORT ONLY (CS) 8 (ANY) T C CATCH-UP ACCRET ONLY (CS) 8 (ANY) A,E I INSTALLMENT (NPV) AMORT ONLY (CS) 8 (ANY) T I INSTALLMENT (NPV) ACCRET ONLY (CS)

*(T) = AMORT/ACCRET BEGINS ON TRADE DATE OF PURCHASE (T+1) = AMORT/ACCRET BEGINS ON DAY AFTER TRADE DATE OF PURCHASE (CS) = AMORT/ACCRET BEGINS ON CONTRACTUAL SETTLE DATE OF PURCHASE



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These amortization/accretion methods: Apply only to these Accrual Methods:

Scientific Method “A”, “B”, “C”, “D”, “E”, “F”, “N”, “O”, “T”, “V”, and “W”

Level-yield Method “A”, “D”, “E”, “F”, “H”, “O”, “Q”, “R”, “S”, “V”, and “W”

Catch-up and installment (NPV) Method “A”, “D”, “E”, “F”, “O”, “R”, “S”, “V”, and “W”

AAAD SCREEN “AMORT TO CALL” FIELD AND CALL/PUT DATA If call/put data is defined through the Call - Put Date Entry (BOCA) screen, the AAAD AMORT TO CALL field value determines whether or not to acknowledge the calls/puts. AMORT TO CALL values and resulting impact of calls/puts can be seen in Amortization on Callable Bonds in this section. Call date processing is not valid for catch-up amortization.

EFFECTIVE MATURITY DATE PROCESSING If amortization/accretion to effective maturity date is selected for a given bond (that is, AMORT/ACCRET TO EFF MATY DATE = “Y” as defined on the BOSB Screen), EFFECTIVE MATURITY DATE is substituted for MATURITY DATE, and EFFECTIVE MATURITY PRICE is substituted for par for amortization/accretion purposes, until EFFECTIVE MATURITY DATE has been reached. At that point, acquisitions prior to EFFECTIVE MATURITY DATE resume the accrual of amortization/accretion towards call/ put (if applicable), or remain in full accrual status until actual MATURITY DATE has been reached. Meanwhile, acquisitions on or after EFFECTIVE MATURITY DATE will have no regard for EFFECTIVE MATURITY DATE but are amortized/accreted towards call/put (if applicable), or towards actual MATURITY DATE. Effective maturity date processing is not valid for catch-up amortization or manual input of amort/accret.

MANUAL INPUT OF AMORT/ACCRET Manual input of amort/accret (amortization/accretion is “M” on BOSB) ignores all account level options related to amort/accret. Manual input of amort/accret allows the user to specify the daily amount of amort/accret to be accrued. The amount continues to accrue until a new amount is specified or the position no longer exists. See Section 5.200, Manual Input of Amortization for a further discussion.



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17.2 OID, POINT OF SALE AND DE MINIMUS DECISION FLOWCHARTS The next five flowcharts illustrate OID, POINT OF SALE and De Minimus decisions. All flowcharts apply only to bonds having an actual maturity date. The OID flowcharts apply only to accounts electing OID processing (that is, AAAD OID options “1” through “4”). The POINT OF SALE flowcharts apply only to the calculation of POINT OF SALE market discount amort sold for accounts electing this option (that is, AAAD POINT OF SALE options “Y” and “C”). The De Minimus Rule flowchart applies only to accounts electing this option (that is, AAAD DE MINIMUS option “Y”). Flowchart Flowchart Only Applies if: OID Processing Flowchart for OID Options 1 and 2 (Ignore Call/Put Schedule).

AAAD OID is “1” or “2”

OID Processing Flowchart for OID Options 3 and 4 (Acknowledge Call/Put Schedule Per AAAD Amort to Call Option Selected).

AAAD OID IS “3” or “4”

POINT OF SALE Flowchart for POINT OF SALE Option Y. AAAD Point of Sale is “Y” POINT OF SALE Flowchart for POINT OF SALE Option C. AAAD Point of Sale is “C” DE MINIMUS RULE Flowchart for Non-OID Processing and for “Return to Normal...” from OID Processing; (for De Minimus Rule Within OID Processing, see OID Processing Flowcharts).

AAAD De Minimus is “Y”

SYSTEM MANUAL - SECTION 5.120 - AMORTIZATION/ACCRETION - AMORTIZATION/ACCRETION DECISION CHARTS


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OID Processing Flowchart for OID Options 1 and 2 (Ignore Call/Put Schedule) This Flowchart Applies Only if AAAD OID is “1” or “2”



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OID Processing Flowchart for OID Options 1 and 2 (Ignore Call/Put Schedule) (Cont'd) This Flowchart Applies Only if AAAD OID is “1” or “2”



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OID Processing Flowchart for OID Options 3 and 4 (Acknowledge Call/Put Schedule Per AAAD Amort to Call Option Selected). This Flowchart Applied Only if AAAD OID IS “3” or “4”



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OID Processing Flowchart for OID Options 3 and 4 (Acknowledge Call/Put Schedule Per AAAD Amort to Call Option Selected). This Flowchart Applied Only if AAAD OID IS “3” or “4”



124



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POINT OF SALE Flowchart for POINT OF SALE Option Y. This Flowchart Applies Only if AAAD Point of Sale is “Y”



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POINT OF SALE Flowchart for POINT OF SALE OPTION Y (Continued) This Flowchart Applies Only if AAAD Point of Sale is “Y”



127

POINT OF SALE Flowchart for POINT OF SALE Option C This Flowchart Applies Only if AAAD Point of Sale is “C”



128

POINT OF SALE Flowchart for POINT OF SALE Option C (Continued) This Flowchart Applies Only if AAAD Point of Sale is “C”



129

DE MINIMUS RULE Flowchart for Non-OID Processing and for “Return to Normal...” from OID Processing (for De Minimus Rule Within OID Processing, see OID Processing Flowcharts) This Flowchart Applies Only if AAAD De Minimus is “Y”

PER ACCOUNTDEFINITION, NO

AMORT/ACCRETE

START

AAADAMORT /ACCRETMETHOD

= 0 ?

BOSBAM/AC =Y, S, L,C OR I

?

COST< PAR

?

BOBDASSET

GROUP =G1, G2, FH,

FM, MROR RE

?

PER SECURITYDEFINITION. NO

AMORT/ACCRETE

**RETURN TO NORMAL

PROCESSING

IS(PAR-COST)

> (PAR * .00167)* # OF WHOLE YEARSFROM PURCHASE TO

ACTUAL MATURITYDATE ?

IS(PAR-COST)

> (PAR * .0025)* # OF WHOLE YEARSFROM PURCHASE TO

ACTUAL MATURITYDATE

?

PERDE MINIMUS RULE,

NO ACCRETION

**RETURN TO NORMAL

PROCESSING

PERDE MINIMUS RULE,

NO ACCRETION

**RETURN TO NORMAL

PROCESSING

N

N

N

N

N

N

Y

Y

Y

Y

Y

Y

AAAD DE MINIMUS VALUES:

N = DO NOT PERFORM DE MINIMUS RULE ANALYSIS

Y = PERFORM DE MINIMUS RULE ANALYSIS

AAAD DE MINIMUS VALUES:

N = DO NOT PERFORM DE MINIMUS RULE ANALYSIS

Y = PERFORM DE MINIMUS RULE ANALYSIS

** ‘RETURN TO NORMAL…’ IN THE CONTEXT OF THIS FLOWCHART MEANS EXIT NON-OID DE MINIMUS PROCESSING, AS THOUGH AAAD DE MINIMUS WERE ‘N’



130

17.3 ACCRUAL METHOD “B”, “C”, “T”, AND “N” SPECIAL CONSIDERATIONS When a bond having accrual method “B”, “C”, “T” or “N” is purchased at a discount, the discount is typically accrued as accretion or as income. However, under certain circumstances, the discount is accrued neither as accretion nor as income and is instead treated as (unrealized or realized) gain. The following table illustrates the variables involved in determining how such a discount gets treated:

AAAD AM/AC METH

AAAD ACCR METH NOT TO AMORT

BOSB AM/AC

Assuming CONDITION “A”, discount is treated

as:

Assuming CONDITION “B”, discount is treated

as: 1,4 (blank) Y,S,L GAIN GAIN

1,4 (blank) N INCOME GAIN

1,4 B,C,T,N Y,S,L INCOME GAIN

1,4 B,C,T,N N INCOME GAIN

2,5 (blank) Y,S,L ACCRETION ACCRETION




3,6 (blank) Y,S,L ACCRETION ACCRETION




Table Legend Column Value AAAD AM/AC METH 0 = No amort/accret.

1, 4 = Amort premiums only. 2, 5 = Accret discounts only. 3, 6 = Amort premiums and accret discounts.

AAAD ACCR METH NOT TO AMORT Indicates accrual methods not eligible for amort/accret.

BOSB AM/AC

Y, S, L = The security qualifies for amort/accret. N = The security does not qualify for amort/accret.

CONDITION “A”: The account has NOT elected OID and/or POINT OF SALE processing.

CONDITION “B”: The account has elected OID and/or POINT OF SALE processing and a RETURN TO NORMAL PROCESSING condition has been encountered.

Documents

5.120 Amortization/Accretion - docs.sungard.comdocs.sungard.com/InvestOne/140Doc/System_Manual/Section_5/5_120.pdf · Amortization is the process of decreasing the book value of a