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Working with Fixed-Income Investments

In This Chapter

Fixed-Income Investments At a Glance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Understanding Fixed-Income Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Setting Up a Basic Fixed-Income Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Setting Up Special Fixed-Income Investment Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Understanding Payment-in-Kind (PIK) Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Understanding Asset-Backeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Understanding Interest-Only Asset-Backeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Understanding Coupon Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Understanding Record and Payment Dates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Understanding Accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Understanding How Geneva Records Interest Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Understanding Custom Coupon Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Using Variable Rate Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65How Geneva Accounts for Fixed-Income Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Understanding Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Setting Up Amortization Rules in Geneva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81Understanding Defaulted Fixed-Income Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88Using the Financial Calculator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Working with Fixed-Income Investments4

40

Fixed-Income Investments At a Glance

1 Understanding fixed-income investments.

An overview of Bond and Asset-Backed investments.

See “Understanding Fixed-Income Investments” on page 42.

2 Setting up fixed-income investments.

Define the fixed-income investments you track: Bonds (Government issues, corporate and municipal bonds, emerging market debt, fixed- and floating-rate investments, index-linked investments, index-adjusted securities, zero coupon bonds, debentures, and notes) and Asset-backeds (Mortgage-backed investments, interest-only (IOs), principal-only (POs), planned amortization class IOs (PAC IOs), and pools.)

See “Setting Up a Basic Fixed-Income Investment” on page 43.

3 Understanding accrual and variable rates.

Geneva calculates accrual based on the dates, coupon frequency, and interest rate you define. Geneva can also track interest rate resets for variable-rate investments and repos.

See “Understanding Coupon Schedules” on page 55.

See “Defining a Variable Rate Schedule” on page 66.

4 Understanding amortization.

Some bonds are purchased at a discount or premium. Geneva can accrue interest or OID, accrete market discount, and amortize premiums. Use the amortization settings to define how Geneva amortizes these values.

See “Understanding Amortization” on page 77.

See “Understanding Which Values Geneva Amortizes” on page 78.

See “Understanding Amortization Methods” on page 80.

Working with Fixed-Income Investments 4

41

5 Opening, closing, and financing transactions.

Although Geneva can enter interest receipt transactions for you automatically, there are some instances where you will want to enter fixed-income transactions manually.

See “How Geneva Accounts for Fixed-Income Transactions” on page 71.

See “Financing Transactions” on page 75.

6 Use the Financial Calculator.

Use Geneva’s Financial Calculator to compute yields, interest, accruals, amortization, and other information for fixed-income investments.

See “Using the Financial Calculator” on page 94.


Understanding Fixed-Income Investments42

Understanding Fixed-Income InvestmentsGeneva tracks two principal kinds of fixed-income investments:

Fixed-income securities are defined by face amount, interest rate, and duration. All of these together contribute to issue yield and yield to maturity. Geneva calculates these values in different ways for different fixed-income security types.

In Geneva, you will find some of the same features and settings for STIFs, swap Financing investments, credit default swaps, and credit facilities and contracts (bank debt), that you see in fixed-income investments.

Note: If you want Geneva to be able to determine a fixed-income investment’s coupon schedule, accruals, and amortization correctly, you must set up a business calendar for the investment’s exchange that covers the entire period from the investment’s issue date to its maturity.

Use For Choose Define ➤Investments ➤

Bonds Government issues, corporate and municipal bonds, emerging market debt, fixed- and floating-rate investments, index-linked investments, index-adjusted securities, zero coupon bonds, debentures, and notes.

Bond

Asset-backeds Mortgage-backed investments, interest-only (IOs), principal-only (POs), planned amortization class IOs (PAC IOs), and pools.

Asset Backed


Setting Up a Basic Fixed-Income Investment 43

Setting Up a Basic Fixed-Income Investment

Many setup tasks are common to bonds, asset-backeds, and investments.in HelpDetails

bond investments, defining

asset backeds, defining

A Closer Look at Fixed-Income Investments

The Bond Specific and ABS Specific tabs have many fields in common. Use the investment specific tab to define the accrual specifications.

A Issue and maturity date and price information. (Dated Date is for bonds only.)

B Specify the investment’s coupon schedule. For details, see “Geneva’s Automatic Interest Generator” on page 63. For information about:

Defining a zero-coupon investment, see “Defining a Zero-Coupon Investment” on page 45.

Specifying custom record dates for an investment’s interest payments, see “Understanding Custom Coupon Schedules” on page 64.

C Specify how the investment accrues interest. Geneva accepts 30/360, 30E/360, 30E+/360, Actual/360, Actual/365, and Actual/Actual accrual calendars.

A

B

C


Setting Up a Basic Fixed-Income Investment44

A Closer Look at Setting Up Bonds and Asset-Backeds

Enter most information on the Bond Specific or ABS Specific tab. Use the other tabs to set up index-adjusted bonds, or bonds with call or put schedules or sinking fund schedules, see:

“Defining an Index-Adjusted Bond” on page 46.

“Understanding Sinking Fund Bonds” on page 47.

“Understanding Call and Put Schedules” on page 47.

A Select this check box for investments that trade without accrued interest. For details, see “Understanding Settlement Without Accrued Interest” on page 72.

B Select this check box for a financing transaction (repo) loan investment. For details, see “Financing Transactions” on page 75.

C Geneva automatically selects this check box if you define a variable rate schedule for the investment. For details, see “Defining a Variable Rate Schedule” on page 66.

D For a variable-rate bond based on a reference index, if the bond’s reset rates are based on an earlier date’s index rate, rather than the reset date’s rate, enter the number of business days that Geneva “looks back” to find the index rate on which to base the reset rate. For details, see “Understanding Accounting Parameters” in Getting Started with Geneva.

You can set up principal-only and interest-only asset-backeds, pool investments, CMO “Z” bonds, and other types of asset-backed investments.

A Select these check boxes if the investment pays only principal, or only interest. For details, see “How Geneva Accounts for Interest-Only Asset-Backeds” on page 54.

B Specify whether cash or income offsets the change to quantity and cost in paydowns for the investment. For details, see “Understanding Asset-Backed Payment Options” on page 75.

C Enter a pool number for the investment.

AB

C

D

A

B

C


Setting Up Special Fixed-Income Investment Types 45

Setting Up Special Fixed-Income Investment Types

Defining a Zero-Coupon Investment

To define a zero-coupon investment, enter an interest rate of 0, and a coupon frequency of Annual.

To define a zero-coupon convertible bond, enter an interest rate of 0, and a factor (on the Misc tab) greater than 0. This allows you to enter an issue price that is greater than or equal to the maturity price. (Typically, you define both as 100.) Geneva calculates zero accrued interest and yield on cost for these investments.

Note: As with other investments, Geneva does not use the Factor field in conversions or calculations. It is for reference purposes only.

A Closer Look at Fixed-Income Investment Preferences

You use the Preferences tab to enter optional settings that Geneva uses in yield, interest, interest accrual, and amortization calculations.

A For details, see “Understanding the Coupon Based On Calendar Setting” on page 60.

B Select this check box if you do not want Geneva to accrue interest for the investment.

C Geneva uses these settings to calculate yields.

D For details, see “Understanding Step Coupon Bonds” on page 48.

E Select how Geneva treats an interest payment’s nominal date if it occurs on a non-business day. For details, see “Understanding Accrual Conventions” on page 61. (Note: Asset-backeds display the Accrues From/To Business Day check box, which corresponds to the Following (selected) and None (cleared) accrual conventions.)

F Assign the investment to an amortization type, which determines how Geneva amortizes it. For details, see “To define an amortization matrix” on page 83.

G Select the method by which Geneva determines the date used to calculate amortization and interest accruals for the investment. This overrides the setting from the portfolio’s accounting parameters.

C

FB

E

D

A

G


Setting Up Special Fixed-Income Investment Types46

Defining an Index-Adjusted Bond

Index-adjusted bonds typically have a fixed interest rate, but their principal is adjusted on a regular basis based on a specified index. This adjustment to the bond’s principal affects both its interest accrual and its principal payment at maturity.

Example: U.S. Treasury Inflation Protected Securities (TIPS) have semiannual interest payments, based on the inflation-adjusted principal at the time when the interest is paid. The index used to measure the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics.

Opening and closing, deliver, receive, and transfer transactions for index-adjusted bonds display an Original Face field, similar to that for asset-backeds. If you enter an Original Face value, but leave the Quantity (current face) defined as 0, the transaction displays an Index Ratio field, which displays the ratio between the bond’s index value on the trade date and its issue index value. Geneva automatically calculates the current face (Quantity) as Original Face × Index Ratio (rounded to the number of decimal places you specify). For closing transactions, Geneva separates the index adjustment gain from the price gain.

A Closer Look at Setting Up Index-Adjusted Bonds

When you set up an index-adjusted bond, click the Index Adjusted tab.

A Select this check box to indicate that the bond is an index-adjusted bond.

B Enter the investment’s index value on its issue date. Geneva calculates each day’s accrued interest for the bond as (Daily index value/Issue index value) × Daily accrued interest.

C You use the prices of a reference index investment (typically an equity) to record the index-adjusted bond’s index values, similar to the base rates in a variable-rate bond based on a reference index. The bond accrues and pays interest based on its principal during each segment of the accrual period. For details, see “Setting Up a Reference Index Investment” on page 67.

D Specify the number of decimal places to which Geneva should round the index value (the price of the reference index investment) before multiplying it by the bond’s original face in order to calculate its current face.

E Specify the number of business days after the valuation date that Geneva looks to find the reference index value that it uses to calculate the bond’s market value (Default: 1).

A

B

C

E

D


Setting Up Special Fixed-Income Investment Types 47

Understanding Call and Put Schedules

The Call/Put tab on the Bond screen that allows you to specify an unlimited number of call and put dates for a bond.

Note: You specify whether Geneva yield-to-worst and yield-to-best to amortize the bond when you set up the amortization settings for the amortization type to which you assign the bond. For details, see “Choosing how Geneva amortizes the call/put schedule” on page 87.

Understanding Sinking Fund Bonds

Use the Bond screen’s Sinking Fund tab to specify a sinking fund schedule for a bond with a schedule of redemption dates. After you set up a sinking fund schedule for the bond, Geneva enters a Sink transaction in the GDTP portfolio for each sink date that you define in the bond’s sink schedule. You do not need to enter these transactions manually.

A Closer Look at Setting Up Call/Put Schedules

To set up a callable or putable bond, click the Call/Put tab.

A Enter the date on which the issuer may call the bond.

B Enter the price at which the issuer may call the bond.

C At the bottom of the screen, repeat these steps for each date in the put schedule, if applicable, specifying the dates on which the holder may put the bond, and at what price.

A

B

C

! Important: Geneva calculates all call and put scenarios as a 100-percent call or put. Geneva does not calculate partial call or put scenarios.


Setting Up Special Fixed-Income Investment Types48

Understanding Step Coupon Bonds

You can use Geneva to track step coupon bonds (also called “step-up notes,” “step coupon,” “stepped-rate coupon,” or “step” bonds). A step coupon bond is typically issued at a discount, commonly known as the Original Issue Discount (OID). It has a low initial interest rate that “steps up” to a higher interest rate at a predetermined point later in the life of the investment.

To set up a step coupon bond

1 On the Bond Specific tab, enter an Issue Price.

2 On the Preferences tab, select the Step Up Bond check box. When you select this check box:

On the Bond Specific tab, the Issue Price becomes a required field, and the Interest Rate field becomes unavailable.

A Closer Look at Setting Up Sinking Fund Schedules

To set up a sinking fund bond, click the Sinking Fund tab.

A Select this check box to specify that this is a sinking fund bond. When you do, Geneva displays the table where you enter the sinking fund schedule.

B Select this check box unless the sink price is less than 100. If you select this check box, you must supply the original face value when you enter a Buy transaction for the bond, and Geneva will automatically calculate the quantity using the current ratio.

C Select Factor if the sink price is expressed with a pricing factor, or Percent if the sink price is expressed as a percentage of the face value.

D Enter a sinking fund date. This date must be a coupon date for the bond.

E Depending on whether you chose Factor or Percent, enter the pricing factor or percentage of face value that the sinking fund pays for this bond on the sink date. For Factor, enter the factor of original face amount remaining after this Sink transaction, expressed as a decimal amount. For example, if 90 percent of the outstanding quantity is remaining after this Sink transaction, then enter 0.90. For Percent, enter the percentage of original face amount or quantity paid down with this Sink transaction.

AB

C

DE


Understanding Payment-in-Kind (PIK) Bonds 49

If you do not define a variable rate schedule for the bond, then by default Geneva sets the interest rate to zero.

3 Enter an issue price for the bond.

4 Choose Define ➤ Variable Rate Schedules. Create a variable rate schedule for the bond, where you specify the bond’s initial interest rate as of the issue date. Then specify each step-up date and subsequent rate as a variable rate reset. If you do not specify an initial interest rate, Geneva assumes that the initial interest rate is zero.

Except for the initial interest rate, Geneva permits a rate change for a step coupon bond only on one of the coupon dates identified in the bond’s coupon schedule.

For more information about variable rate schedules, see Understanding Accounting Parameters” in Getting Started with Geneva.

Understanding Payment-in-Kind (PIK) Bonds A payment-in-kind (PIK) bond is a bond that pays interest in one of the following ways:

A regular interest payment (that is, in cash).

Additional shares or principal of the bond (that is, as payment-in-kind).

A combination of both shares or principal and cash

Depending on how you set up the bond, Geneva’s Automatic Interest Generator can enter in-kind payment transactions for you, just as it does regular interest payments.

How to set up a PIK bond

Use the Bond definition screen to set up a PIK bond. Set up the bond just as you would any other bond, and then, after you have added the new Bond record, use the Bond definition screen's Coupon Schedule tab to specify the PIK coupon details for either the entire coupon schedule or just for specific coupon dates.


Understanding Payment-in-Kind (PIK) Bonds50

A Closer Look at Setting Up a PIK Bond

Use the Coupon Schedule tab to specify the PIK portion for a PIK bond's coupon payments.

Before you begin: Make sure you have defined the first coupon date in the investment's First Coupon field (on the Bond Specific tab).

A Select the Show Default Coupon Dates check box to display the default coupon dates for this bond. For more detail, see “Understanding Coupon Schedules” on page 55.

B (Required) Select the PIK Coupon check box to indicate that this is a payment-in-kind credit bond. When you do, Geneva displays a PIK Portion column in the Coupon Schedule table and makes other PIK settings available on this screen.

C Select this if you do not want Geneva to report daily accrued interest for the PIK portion of the accrued interest. Geneva does not create daily accrued interest JE lines and reports do not show daily accrued interest for these investments until the coupon’s payment date, when it is reported as part of the coupon payment. This applies only to the PIK portion of the coupon. Geneva assumes that the price you enter for the transaction includes PIK accrued interest.

D Choose one of these to indicate whether the value you enter in the PIK Portion field or column is a percentage of the total coupon (Percent) or a rate applied to the investment’s face amount (Rate/Factor).

E Use this to define a default percentage or rate/factor that covers all payments throughout the life of the bond. The amount applies across all coupons, whether the bond uses a fixed rate or a variable rate. By default this is auto-populated with 100. Because the PIK Method is set by default to Percent, if you make no changes this means that 100 percent of each coupon is paid in kind.

F If the PIK portion changes over the life of the bond, use this to define a percent or rate/factor for specific coupon dates.

Example: You track a bond with a total interest rate of 10%, half of which is PIK. If you had selected:

Percent method, then the PIK portion is expressed as a percentage of the whole coupon. You would enter a value of 50 (that is, 50% of the coupon).

Rate/Factor method, then the PIK portion is the actual interest rate allocated to PIK. You would enter a value of 5 (that is, 5% of the bond's face amount is paid as PIK).

If you're entering a percent value, you can enter a value greater than or equal to 0, up to 100. If you're entering a rate/factor value, you can enter a value greater than or equal to 0, up to the total interest rate for the contract.

E

A

C

D

F

B


Understanding Asset-Backeds 51

Understanding Asset-BackedsMortgage-backed and asset-backed securities are collections of loans that have been securitized and sold as debt instruments. Its value is backed by underlying assets such as mortgage loans, auto loans, or credit cards. Income payments are derived from the loan payments on the underlying assets. When these assets are pooled into a financial instrument (a process called securitization), the resulting instrument can be sold to multiple investors. This can serve to diversify risk because each security represents only a fraction of the total pool of underlying assets.

An asset-backed security may also be known as a pass-through security because it has loan payments that pass through from the debtor (for example, the homeowner) to the owner of the security (such as the holder of a Ginnie Mae pass-through security).

Setting Up Prepayment Information for Asset-Backeds

Pass-through securities present a challenge to bond investors in that the debtor may prepay the loan at any time. Thus the investor cannot know in advance how much principal and interest they will receive. The debtor’s ability to essentially call the bond, or partially call the bond, at any time creates reinvestment risk for the investor.

Geneva allows you to identify prepayment risk and factor it into amortization calculations. Geneva can perform scientific amortization on asset-backed pass-through securities, unless you specify a custom coupon schedule. For asset-backed investments with a custom coupon schedule, Geneva defaults to linear amortization. For more information see “Understanding Amortization” on page 77.


Understanding Asset-Backeds52

A Closer Look at Setting Up Asset-Backeds with Prepayment Risk

To set up an asset-backed pass-through security with prepay risk, click the Prepayment Data tab.

A Choose a prepay model to be used when calculating amortization for this asset-backed:

CPR Model: Select this if you want to use the Constant Prepayment Rate (CPR) prepayment model. This formula uses the compounded percentage of the loan pool that is expected to prepay in the coming year. The CPR is an annual percentage rate. Entering 6.0% CPR would mean that 6.0% of the principal is expected to pre-paid in a year. The standard model can be described as having a CPR that begins at 0.2% and increments by 0.2% each month until the 30th month, when it stabilizes at a 6% CPR. Home-equity loans are based on this model. The CPR is equal to the annualized rate of expected monthly prepayments divided by the outstanding balance at the beginning of the period.

PSA Model: Select this if you want to use the PSA prepayment model (developed by the Bond Market Association, previously known as the Public Securities Association). The PSA model is formulaically related to the CPR model. If the ABS age is 30 or more months, then 100 PSA = 6% CPR. If the ABS age less than 30 months, then 100 PSA = 6% x (number of months / 30). For example, a PSA value of 50 is half the CPR rate.

If you want to change the prepayment assumptions, select the Modify PSA Assumptions check box. Geneva will display two additional columns, the PSA Max Rate and the PSA Ramp Length. This allows you to customize the length and maximum rate of the prepayment model. For example, the ramp length could be updated from 30 to 40 periods or the maximum rate could be changed from 6 to 8%.

If you select PSA Model, then Geneva displays these fields:

B Date: Enter the date that the prepayment assumptions begin.

C WAC: Enter the Weighted Average Coupon (WAC), which is the gross annual weighted average coupon rate expressed as a percentage.

D WAM: Enter the Weighted Average Maturity (WAM), which is the remaining term to maturity in months.

E PSA Speed: Enter the Public Securities Association (PSA) prepayment rate. Use this to increase or decrease the prepayment rate predicted by the standard model. Geneva uses this to predict the principal prepaid by borrowers. The standard model describes a series of increasing Constant Prepayment Rate (CPR) until the 30th month, at which point the CPR remains at 6%. PSA is a percentage multiplied against the current CPR predicted by the standard model to give an adjusted CPR. Use PSA to increase or decrease the predicted prepayment rate. For example, according to the standard model, a bond in its 35th month has a CPR fixed at 6%. If you enter a PSA of 200%, then the computed CPR is 12%.

DE

A

B

C


Understanding Interest-Only Asset-Backeds 53

Understanding Interest-Only Asset-BackedsInterest-only securities are asset-backed investments that have been “stripped,” so they pay only the interest portion of the original investment. The investor does not receive a principal payment. Following GAAP methodology, however, Geneva does account for amortization of premium or discount when calculating the amount of each interest payment.

Rather than accounting for all interest from an interest-only security as interest income, Geneva uses an effective yield value to derive that portion of the interest that is attributable to amortization of premium or discount, and then breaks out the amortization separately on reports, where it is identified as a reduction of or increase to the interest income.

To set up an interest-only asset-backed

1 Set up the interest-only security as an Asset Backed investment. Do not enter prepayment information. On the ABS Specific tab, select the Interest Only check box.

2 When you enter an opening transaction for the investment, enter a value in the Effective Yield field. Do this on any of the following transaction types: Buy, Receive Long, Sell Short, Receive Short. This is a required field for interest-only securities.

3 In the Amortization Settings for the portfolios where you hold the investment, choose either the Prospective or Retrospective amortization method.

Prospective: This method uses estimated cash flows. When a new set of estimated cash flows becomes available, Geneva retains results from the amortization calculations to date and uses the new estimates to amortize from that point forward.

Retrospective: The retrospective method uses a combination of actual and projected cash flows. It uses actual flows for as many dates as are available and projected cash flows for the remaining dates until the bond is fully repaid.

4 Enter Paydown transactions for the investment as they occur.

! Important: Geneva reports amortization for paydown securities on the Bond Analytics, JE Lines, and Tax Lot Appraisal reports. The effective yield field on the Bond Analytics Report displays the yield used to calculate period amortization for an ABS with prepay assumptions. This yield is the annualized, bond equivalent yield (BEY) of the monthly IRR of the adjusted (amortized) cost and expected future cash flows to maturity. Effective yield will match yield on cost (YOC) for the first full or partial period but will vary on each paydate thereafter based on the difference in prepay assumptions and actual future paydowns. Effective yield will remain static for all period end dates within a pay period.

q Tip: For any asset-backed, IO security, or PO security for which you entered prepayment data on the Prepayment Data tab, you must enter the Paydown transaction in the Geneva Dependent Transaction Pool (GDTP). This is so that Geneva can account for the prepayment assumptions in the amortization calculations.


Understanding Interest-Only Asset-Backeds54

How Geneva Accounts for Interest-Only Asset-Backeds

When you enter a Paydown transaction for an interest-only asset-backed, Geneva reduces its face amount by the factor defined in the Paydown transaction, thus arriving at a new current face amount. Each subsequent paydown further reduces the face amount. Geneva multiplies the current face amount by the asset-backed’s interest rate to calculate the payment on the underlying loan.

Not all of the monthly payment amount is income. Part of this is interest income and part is amortized as the return of principle on the underlying loan. To calculate the income portion of the payment, Geneva requires that you enter an effective yield value in the opening transaction. This is an interest rate based on estimated future cash flows, equivalent to an internal rate of return, or IRR.

Note: Effective yield is a value that you calculate outside Geneva.

Payment: An Example

Assume you buy an interest-only security with an original face amount of $1,000,000 at a price of $30 (in other words, the portfolio’s cost at issue is $300,000). The investment’s interest rate is 6%, and the opening transaction’s effective yield is 8%. The investment accrues 30 days per month and 360 days per year (represented below as 30/360).

On the first coupon date, the prepayment factor is 1.0, so Geneva calculates the payment as follows:

Payment = Factor × Original Face × Interest Rate × 30/360

= 1.00 × $1,000,000 × .06 × 30/360 = $5,000

On the second coupon date, the paydown factor is 0.95 (from the Paydown transaction), and Geneva calculates the loan payment as follows:

= 0.95 × 1,000,000 × .06 × 30/360 = $4,750


Understanding Coupon Schedules 55

The remainder of the Interest Receipt payment amount is the return of principle on the underlying loan.

Note: The investor receives only the earned interest income; an interest-only security holder does not receive principle amount.

Understanding Coupon SchedulesWhen you define a fixed-income investment, you must enter three required dates on the investment definition screen: the issue date, dated date, and maturity date. These dates define

Earned Interest Income: An Example

On the second coupon date, the paydown factor is 0.95 (from the Paydown transaction), leaving a current face of $950,000, or 95 percent of the original face. Multiply .95 by the portfolio’s cost to calculate the cost adjusted for Paydown transactions. Then add the accumulated amortization of principal remaining after the Paydown transactions. This gives you the new cost basis at the end of the current period.

Cost Basis = Original Cost × (Current Face / Original Face) + Accumulated Amortization After Paydown

= $300,000 × ($950,000 / $1,000,000) + $2,850

= $285,000 + $2,850 = $287,850

Geneva applies the opening transaction’s effective yield to the cost basis in order to determine the portion of each payment that is earned interest income (also called “effective interest”). Assuming the same investment definition as in the previous example, Geneva calculates the earned interest as follows:

Earned Interest = Effective Yield × Cost × 30/360

= 0.08 × $287,850 × 30/360 = $1,919

Amortization of Principle: An Example

The remainder the payment after earned interest income is amortization of principle. Assuming the same investment definition as in the previous examples, Geneva calculates the amortization of principle as follows:

Amortization = Interest Receipt – Earned Interest

= $4,750 – $1,919 = $2,831

When the earned interest reaches the point where it is greater than the payment, then amortization is equal to zero and remains at zero until the end of the asset-backed amortization schedule.


Understanding Coupon Schedules56

the term of the bond and when interest accrual begins. Geneva also calculates how frequently the investment makes coupon payments, when to record them, and who receives the payment if the investment changes hands.

The following table explains which date Geneva uses to determine the coupon cycle.

KE

Y

CO

NC

EP

T

How Geneva determines the nominal coupon dates

To determine coupon cycles, Geneva uses the coupon frequency and some combination of the following dates, calculating backward or forward from the appropriate date:

Dated date (required).

First coupon date (optional). *

Next-to-last coupon date (optional).

Geneva can use any one of these three dates, with the coupon frequency, to determine the coupon cycle. This date is referred to as the “cycle date.”

* A Stock Loan Contract investment can use either the first record date or the first coupon date.

If you enter: Geneva calculates the coupon cycle:

Neither a first coupon nor next-to-last coupon.

Forward from the dated date.

The first coupon but no next-to-last coupon.

Forward from first coupon date.

The next-to-last coupon, but no first coupon.

Backward from last coupon date.

The first coupon and the next-to-last coupon.

Forward from first coupon date up to next-to-last coupon date.

! Important: If you specify a first coupon or a next-to-last coupon date, the two dates do not need to be in cycle with the dated date. In this way you can define an odd first-cycle or next-to-last-cycle coupon investment. Use the maturity date to specify an off-cycle last coupon.


Understanding Coupon Schedules 57

End-Month Convention

The investment’s End-Month Convention setting determines whether Geneva moves all of the coupons’ nominal dates to the end of the month, as follows.

After Geneva determines each Interest Receipt transaction’s nominal date, it uses the investment’s Record Interval Method and Payment Delay Method settings to determine its record and payment dates. You can also define custom record dates for each coupon. For details, see “Understanding Custom Coupon Schedules” on page 64.

A Closer Look at the Coupon Schedule

Geneva determines coupon cycle based on the “cycle date” (see “How Geneva determines the nominal coupon dates” on page 56) and the coupon frequency. The coupon frequency, along with settings such as the Coupon Based on Calendar check box, determines the length of each coupon period. In the diagram below, the coupon frequency is semiannual, so each coupon period is half a year.

Each coupon period for the bond in this diagram is half a year. You can also choose among these intervals in the Coupon Frequency field: Annual, Every 28 Days, Every 35 Days, Every 49 Days, Every 7 Days, First Wednesday, Monthly, Quarterly, Semi Annual.

If you choose this convention:

Then Geneva does this:

Adjust Adjusts all of the nominal dates to be on the last day of the month, if any of the investment’s interest payments has a nominal date on the last day of the month.

DoNotAdjust (Default) Uses the nominal dates as generated. If the nominal date falls on the 28th, 29th, 30th, or 31st, then you cannot use this option, because it does not distinguish from an end-of-month date for some months. You must specify whether you want Geneva to use either the 28th, 29th, or 30th, or to adjust (“Adjust”) to the end-of-month date.

28th, 29th, 30th Adjusts all of the investment’s interest payments to have a nominal date on the 28th, 29th, or 30th of the month, respectively. (This is a variant of DoNotAdjust.)

“Cycle Date” 01/01/2001

Coupon Period}

Nominal Coupon Date 07/01/2001

Nominal Coupon Date 01/01/2002

Coupon Period}

! Important: Geneva calculates coupon schedules, accruals, and amortization based on the business calendar you specify in the portfolio’s accounting parameters (not the calendar specified in the definition for the investment’s trading exchange).


Understanding Record and Payment Dates58

Understanding Record and Payment DatesIn practice, the coupon is seldom paid on the coupon date. Typically the owner of a fixed-income investment doesn't actually receive the payment until a few days later, on the payment date. In addition, the coupon is not always paid to the person who owns the investment on either the coupon date or the payment date. Geneva uses record date to determine who receives the coupon.

This section describes how Geneva determines the following:

The party who receives the Interest Receipt transaction, if the investment is bought or sold immediately prior to a coupon date. This is determined by identifying the owner of record on the record date.

The date used to record the payment (Interest Receipt transaction). This is the payment date.

A Closer Look at Coupon-Related Dates: Who Receives the Payment and When

Unless you specify a custom coupon schedule, Geneva determines your nominal coupon dates automatically, based on the bond’s “cycle date” and coupon frequency. The coupon period is the period between nominal coupon dates.

If today is Wednesday 7/1/2009 and it is the nominal coupon date for your fixed-income investment, you won't actually receive the payment until a few days later. How many days is determined by the payment delay. If the payment delay is 2 days, then you'd actually receive the payment on Friday 7/3/2009.

If you sold the bond today, then the matter of who would receive today's coupon—you or the buyer— would depend on the record interval. If the record interval is one day, then as long as you still held the bond on Tuesday 6/30/2009 (one day before the nominal coupon date of today), then you would still receive today's coupon. The record date is the day that the issuer identifies everyone who holds their debt instrument as the owner of record.

Specify the record interval and payment delay settings on the Bond Specific or ABS Specific tab.

The record date is calculated backward from the coupon date using the record interval you specify.

The payment date is after the coupon date, based on your payment delay. The payment date is when the interest payment is actually issued.

“Cycle” Date

Coupon Period

Record Date

Record Interval Payment Delay

Payment Date

Coupon Date (nominal date)


Understanding Accrual 59

How coupon dates relate to trade dates

What if a fixed-income investment changes hands before a coupon payment is made. Who receives the coupon—the seller or buyer? That depends on when the transaction settles.

Understanding AccrualThe accrual preferences are used to define how Geneva calculates accrued interest for a given coupon period.

Understanding the Accrual Days/Month Setting

Use this field to enter the number of accrual days in a month. The options are 30, 30E (30E/360 European convention), 30E+, and Actual (the default). The 30, 30E, and 30E+ options are all based on thirty accrual days per month and differ only in the way they compute the number of days in a given interval.

Understanding the Accrual Days/Year Setting

Use this field to enter the number of accrual days in a year. The options are 360, 365, and Actual (the default). Geneva allows only the accrual days/month and accrual days/year combinations in the first column of the following table.

Date 6/29/2009 6/30/2009 7/1/2009 7/3/2009

Coupon-related dates (see the timeline in the previous section)

Hypothetical trade date for a T+1 fixed-income investment.

Record date (coupon date minus record interval days). Issuer identifies the holder of record. You must settle on or before this date in order to receive the coupon.

Nominal coupon date. The interest accrues up to this date.

Payment date (coupon date plus payment delay days). Owner of record receives coupon payment.

When you choose this

Geneva does this:

30 Changes a starting date of 31 to 30. An ending date of 31 also changes to 30 whenever the starting date is 30 or 31.

30E Changes a starting date of 31 to 30. An ending date of 31 always changes to 30.

30E+ Changes a starting date of 31 to 30. Does not change an ending date of 31.

Actual Sets the number of accrual days to the actual number of calendar days in each month.


Understanding Accrual60

Note: For variable rate investments, selecting Actual/Actual has the same effect as selecting the Coupon Based On Calendar check box.

Understanding the Coupon Based On Calendar Setting

On the Preferences tab, use the Coupon Based On Calendar check box to determine whether the number of days in a coupon period affects a coupon’s accrual and payment amounts.

This check box is not available for repo loan investments. Geneva treats all fixed-rate repo loan investments as having Coupon Based On Calendar cleared, and all variable-rate repo loan investments as having Coupon Based On Calendar selected.

Note: If you select this check box for an investment that uses a:

Geneva allows only these combinations

Use the preceding combination with this investment type:(These are included for illustrative purposes only and do not represent an exhaustive list.)

30/360 U.S. Corporate Bonds

30E/360 ECU Issues

30E+/360 German Bunds

Actual/360 U.S. Repurchase Agreements

Actual/365 U.K. Gilts

Actual/Actual U.S. Treasuries

If this check box is

Geneva calculates a coupon’s payment amount as

Geneva calculates the investment’s accrued interest as

Cleared (Par value × Interest Rate)/Coupon Frequency

(Par value × Interest Rate × Number of days of accrual)/(Coupon Frequency × Actual number of days in accrual period)

Selected (4) (Par value × Interest Rate × Actual number of days in coupon period)/Accrual days in year

(Par value × Interest Rate × Number of days of accrual)/Accrual days in year

Accrual calendar Geneva

30/360 Books only 28 days worth of interest for the investment for the month of February as of February 28. (If you calculate accrued interest as of March 1 or later, however, Geneva books the full 30 days of accrued interest for February.)

Actual/Actual Calculates the day count as: ((366 × Coupon days in leap year) +(365 × Coupon days in non-leap year))/Total days in coupon period.


Understanding Accrual 61

Understanding Accrual Conventions

On the Preferences tab of the Bond definition screen, use the Accrual Convention field to specify how Geneva should treat an interest payment's nominal date if it occurs on a non-business day. This field also appears on the investment specific tab for a Swap Investment, Credit Default Swap, or Credit Default Swap Index. Geneva supports the accrual conventions recognized by the International Swaps and Derivatives Association (ISDA).

For an introduction to business calendars and exchanges in Geneva, see “Understanding Business Calendars and Exchanges” in Getting Started with Geneva, Chapter 3, Setting Up Investments.

Note: Select Coupon Based On Calendar if you want Geneva to calculate the amounts of an investment’s interest payments based on the number of days in each coupon period.

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How does Coupon Based On Calendar affect variable rate investments?

Geneva treats all variable rate investments as though they have Coupon Based On Calendar selected, unless it is cleared and the investment uses an Actual/Actual accrual calendar. If you do this, however, Geneva generates an Interest Receipt transaction for each of the investment’s reset dates, even if they do not correspond to the investment’s coupon schedule.

Advent recommends that you select the Coupon Based On Calendar check box for variable rate investments that have an Actual/Actual accrual calendar. If you clear the Coupon Based On Calendar check box, Advent recommends that the investment’s variable rate reset dates correspond to its coupon dates.

Accrual convention Geneva

Following Moves the nominal date to the next business day. This may or may not fall within the same month as the originally scheduled date.

Geneva increases the coupon period by the necessary number of days, and increases the coupon amount at the corresponding daily rate.

Example: The nominal date falls on Saturday, September 30, 2006. Geneva moves the nominal date to Monday, October 2.

Note: For asset-backeds and credit facilities, Geneva uses this method if you select the Accrues From/To Business Day check box.

Modified Following Moves the nominal date to the next business day, unless that date is in the next calendar month, in which case Geneva moves the nominal date to the last business day of the current month.

Geneva decreases the coupon period by the necessary number of days, and decreases the coupon amount at the corresponding daily rate.

Example: If the nominal date falls on Saturday, September 29, Geneva moves the nominal date to Friday, September 28, the last business day in that month.


Understanding How Geneva Records Interest Payments62

Understanding How Geneva Records Interest PaymentsThe Automatic Interest Generator enters Interest Receipt transactions for you. The amount of a given payment is based on the coupon frequency, interest rate and the Coupon Based On Calendar check box.

Preceding Moves the nominal date to the most recent previous business day. This may or may not fall within the same month as the originally scheduled accrual.

Geneva decreases the coupon period by the necessary number of days, and decreases the coupon amount at the corresponding daily rate.

Example: The nominal date falls on Saturday, July 1, 2006. Geneva moves the nominal date to Friday, June 30.

Modified Preceding Moves the nominal date to the most recent previous business day, unless that date is in the previous calendar month, in which case Geneva moves the nominal date to the first business day of the current month. If the most recent previous business day is:

In the same month, Geneva uses that day. Geneva decreases the coupon period by the necessary number of days, and decreases the coupon amount at the corresponding daily rate.

Not in the same month, Geneva uses the first business day of the current month. Geneva increases the coupon period by the necessary number of days, and decreases the coupon amount at the corresponding daily rate.

Example: The nominal date falls on Saturday, July 1, 2006. Because the most recent previous business day, June 30, falls in the previous calendar month, Geneva moves the nominal date to Monday, July 3, the first business day in the current month.

End of Month Moves the nominal date to the last available business day of the current month.

Geneva increases the coupon period by the necessary number of days, and increases the coupon at the corresponding daily rate.

Example: The nominal date falls on Saturday, August 26, 2006. Geneva moves the nominal date to Thursday, August 31, the last business day in August.

None (Default) Leaves the nominal date on the originally scheduled date, even if it is a non-business day or holiday.

Geneva does not change the accrual period or the coupon amount.

Note: For asset-backeds and credit facilities, Geneva uses this method if you clear the Accrues From/To Business Day check box.

Accrual convention Geneva


Understanding How Geneva Records Interest Payments 63

Geneva’s Automatic Interest Generator

When you set up a fixed-income investment, Geneva’s Automatic Interest Generator enters the following transactions for it in the Geneva Dependent Transaction Pool (GDTP) portfolio. Geneva applies these transactions to the bond and asset-backed positions in all of your portfolios.

For Geneva generates (a)

All fixed-income investments Interest Receipt (coupon payment) transactions, from the investment’s first coupon date (or the first period after its issue date) to its maturity date.

Bonds, credit facilities and contracts, and credit default swaps

Mature transaction on the investment’s maturity date.

A sinking fund bond Sink transactions on each of the investment’s redemption dates.

Asset-backeds Final Paydown transaction with a factor of 0 on the investment’s maturity date.

Talk to yourGenevaAdministrator

Maintaining Geneva provides your Geneva Administrator instructions for setting up the Automatic Interest Generator.

! Important: If you modify a GDTP Interest Receipt transaction, the Automatic Interest Generator stops generating Interest Receipt transactions for that investment. If you want a portfolio to receive a different Interest Receipt transaction than the one that Geneva generates, first enter an Exempt transaction in the portfolio to exempt it from the GDTP transaction, and then manually enter the new Interest Receipt transaction in the portfolio. For details, look up “Exempt transaction” in Geneva’s Help index.

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TIPS SSC price calculations

Geneva uses the Standard Securities Calculations (SSC) software from TIPS, Inc. to perform its fixed-income calculations. SSC uses the following process to price fixed-income investments. For details, visit the TIPS Web site, http://www.tipsinc.com.

1 SSC calculates the purchase yield for the investment.

2 SSC uses this yield as the discount rate to calculate the present value of all of the investment’s cash flows on the valuation date. This is the investment’s dirty price.

3 SSC subtracts the investment’s accrued interest from this price, leaving the clean price. The difference between this price and the purchase price is the amount to amortize or accrete. For more information, see “Understanding Amortization” on page 77.


Understanding Custom Coupon Schedules64

Understanding Custom Coupon SchedulesGeneva lets you specify custom nominal coupon dates and custom record dates for bonds, asset-backeds, and credit contracts. Use the Coupon Schedule tab to replace a default nominal coupon date or specify a custom record date. You can specify the record date as a specific record date or as an interval of business or calendar days prior to the nominal coupon date.

Geneva uses the custom coupon dates and record intervals only for those interest payments for which you specify a custom entry. For any interest payments for which you do not specify a custom record date, Geneva uses the Record Interval setting from the investment specific tab.

To define a custom coupon schedule

To delete a custom record date or coupon date, click its row in the table, and then click Delete Row . Geneva updates the Interest Receipt transaction with its original record date.

1 Define the bond or asset-backed as usual, and then click Add to commit the record. Geneva creates the investment’s default coupon schedule.

Important: Make sure you have defined the first coupon date in the investment's First Coupon field on the Bond Specific tab. Otherwise, Geneva’s Automatic Interest Generator will not be able to create Interest Receipt transactions for any of the subsequent dates.

2 Click the Coupon Schedule tab. Geneva displays the default coupon dates based on the investment’s issue date and coupon frequency. By default it shows just the coupons within your query range. You can query all coupons by expanding the range of query dates.

3 For each nominal coupon date you want to customize, select the coupon date and enter a new date to replace it.

4 To change record dates, enter one of the following values, depending on how you want Geneva to determine its record date.

Business Days: Enter the number of business days prior to the coupon date that you selected. Geneva excludes weekends and holidays defined by the investment’s business calendar.

Calendar Days: Enter the number of calendar days prior to the coupon date that you selected.

Record Date: Enter a specific record date for the interest payment. This must occur before the coupon date. If you enter a record date before you enter a coupon date, Geneva defaults the coupon date to the nominal date of the investment's next Interest Receipt transaction after the record date.

5 When you finish customizing record dates, click Update .


Using Variable Rate Schedules 65

Note: If you later edit an investment with a custom coupon schedule to change its cycle date and thus its coupon schedule, you must also update its the custom coupon schedule.

Using Variable Rate SchedulesTo create the variable rate reset schedule, for each date when the interest rate changes (the reset date), you must enter the following information in the variable rate schedule table. Each row in the table records one reset.

The new interest rate (called the reset rate), or

For a rate based on a reference index, the:

Name of the index.

Price list and denomination Geneva uses to look up the index rate.

Spread and multiplier (if any) on the reference index rate. Geneva calculates the rate as: spread + (multiplier × reference index rate).

Cap or floor on the rate (if any). If the calculated rate is higher than the cap or lower than the floor, Geneva uses the cap or floor as the reset rate.

When you enter or update a reset rate in an investment or transaction’s variable rate schedule, Geneva regenerates the GDTP Interest Receipt transactions affected by the change. In addition, when you assign a variable rate schedule:

! Important: If you create a custom coupon schedule, then you must be sure to define the first coupon date in the investment's First Coupon field, or Geneva’s Automatic Interest Generator will not be able to create Interest Receipt transactions for any of the subsequent dates.

q Tip: If you create a custom coupon schedule, you can still revert to the default schedule. Open the investment and select the “Show Default Coupon Dates” check box. Even if you have created custom dates, Geneva displays the default dates as they would be generated based on the coupon frequency and the “cycle date” (dated date, first coupon date, or next-to-last coupon date). To restore these default dates, just update the investment record. Geneva records the default dates and uses them to regenerate the coupon schedule. To confirm the change, query the investment in the Transaction History screen.

To a(n) Geneva displays

Investment The Variable Rate check box instead of the Interest Rate field. This check box is selected and inactive.

The Variable Rate Lookback Days field, where you can enter the number of business days before the reset that Geneva “looks back” for a rate for a reset based on a reference index investment.

Transaction “VARIABLE” in the Interest Rate field, which cannot be edited.


Using Variable Rate Schedules66

Defining a Variable Rate Schedule

There are three ways to define a variable interest rate schedule:

For this investment Use this interface Following this procedure to define the variable rate schedule

A credit default swap (CDS), credit default swap index (CDX), credit facility, STIF.

A financing transaction, such as a Lend Cash (Repo) or Borrow Cash (Repo) transaction.

Variable Rate Schedule screen

Enter a reset specification line for each reset date.

For more information, read the following four sections through “A Closer Look at Variable Rate Schedule definitions” on page 68.

A bond, asset-backed, stock loan contract, credit contract, or swap Financing investment that:

Does not have rate resets with a regular frequency.

Does not have reset rates based on a reference index.

Has a reference index investment; price list or denomination for reference index prices; or a spread, multiplier, cap, or floor that changes over time.

Either of these:

Variable Rate Schedule screen

Variable Rate Schedule section of the investment definition screen’s Variable Rate Schedule tab

Enter a reset specification line for each reset date.

For a bond, asset-backed, stock loan contract, credit contract, or swap Financing investment, you can simplify your workflow by using the investment definition screen’s Variable Rate schedule tab. Use this if the investment:

Has rate resets with a regular frequency (annual, semi-annual, and so on).

Is based on a single reference index investment.

Looks up the reference index investment's prices using the same price list and denomination for every reset.

Uses the same spread, multiplier, cap, and floor on all resets.

Automatic Rate Schedule Generation Settings section of the investment definition screen’s Variable Rate schedule tab

Specify an initial reset and a reset frequency. Geneva subsequently enters all of the resets for you.

For more information, read the following three sections through “Setting Up a Reference Index Investment” and then skip to “A Closer Look at Variable Rate Schedule definitions” on page 68.

q Tip: The same conditions and procedures apply to a bond or asset-backed that you use to define the Loan Investment for a Lend Cash (Repo) or Borrow Cash (Reverse Repo) transaction.



Understanding Reference Indexes

To create a schedule based on a reference index, you must create an investment (usually an Equity) to act as the index. You enter the index’s rates in a price list as though they were prices for the investment. Geneva uses the index investment’s “price” on the reset date to calculate the reset rate. For details on setting up an investment to act as a reference index, see “Setting Up a Reference Index Investment” on page 67.

If there is a lag between when the reference index investment’s price changes and when the investment’s interest rate changes, you can use the variable rate investment’s Variable Rate Lookback Days setting to enter this delay. Enter the number of business days (using the reference investment’s business calendar) that Geneva looks back from each reset date to find the price of the reference investment to use to determine the reset rate. If you enter 0 (the default), Geneva uses the reference investment’s price on the reset date, even if that date is not a business day.

Example: If a variable rate investment has Variable Rate Lookback Days defined as 2, and a reset date is a Sunday, Geneva bases the reset rate on the price from Thursday, two business days before the reset date.

Note: Geneva has a seeded price list, VRPriceList, that you can use specifically for entering variable rate resets. For details, see “Geneva’s Seeded Price Lists and Schedule” on page 236.

Setting Up a Reference Index Investment

Before you can set up a variable rate schedule that uses a reference index, you must define the reference index as an investment, usually an equity, as follows.

in HelpDetails

reference indexes, defining investments for

In this tab Do this

General Enter an ID and description, and select an exchange Leave the default value of 0 in the Settlement Days field.

Pricing Enter a local basis currency. You will enter this currency as the denomination in the Variable Rate Schedule screen and the Investment Prices screen. Leave the default values in all of the other fields on this tab.

Groupings Assign the investment to an asset type and investment type. You may want to create special “index” asset types and investment types for this purpose.



To query a variable rate schedule

A Closer Look at Variable Rate Schedule definitions

To create or edit a variable rate schedule, choose Define ➤ Variable Rate Schedules.

A Use this tab to view variable rate resets that you have already entered. For details, see “To query a variable rate schedule” on page 68.

B If you are defining a variable rate schedule for a(n):

Investment, in the Debt field, enter the ID of the variable rate investment.

Lend Cash (Repo) or Borrow Cash (Reverse Repo) transaction, in the Tran ID field, enter the transaction ID.

C Use each row in this table to insert a new reset rate, or update or delete an existing reset rate. For each row, you can enter a specific rate, or a rate based on a reference index. You can also enter a price in the Price Override field to override the reference index rate on the specified date. Geneva calculates the rate from that date until the next reset as Rate/Spread + Rate 2 + Rate 3 + (Multiplier x Ref Index Price [or Price Override]).Note: Except for the initial interest rate, Geneva permits a rate change for a step coupon bond only on one of the coupon dates identified in the bond’s coupon schedule.

D If you enter values in these fields, they appear as the default values in each new table row that you start.

The earliest reset date in the table must be on or earlier than the investment’s dated date, or the transaction’s open date. You cannot delete this reset. For a rate based on a reference index, Geneva looks for a price for the index investment on this date as the base reset rate.

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A

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C

in HelpDetails

queries, variable rate schedules

1 Choose Define ➤ Variable Rate Schedule, then click the Query Options tab.

2 Click Enter Query .

Select the investment or financing transaction whose reset rates you want to see.



If you query the variable rate schedule for an investment with a reset frequency (for example, from the Variable Rate Schedule Info tab), then Geneva will display interest rates only for those days that fall on a reset date. If the investment does not have a reset frequency, then Geneva will display the interest rate resets for all days that fall within the dated date (or trade date, for repos) and the termination date (or settle date, for repos).

Select Existing Data Only to see only dates for which Geneva has resets. If you clear this check box, Geneva displays a line for every date in the date range, even if it does not have a reset rate for a given date.

Enter the date range for the resets that you want to see. Geneva displays all of the resets in this period. If you do not define these fields, Geneva displays resets in the period from 4 years before to at least 32 years after the current date.

3 Click Run Query . The query table displays the results of your query.



A Closer Look at the Variable Rate Schedule tab

For a bond, asset-backed, stock loan contract, credit contract, or swap Financing investment, you can simplify your workflow by using the Automatic Rate Schedule Generation Settings section of the investment definition screen’s Variable Rate schedule tab. Use this if the investment:

Has rate resets with a regular frequency (annual, semi-annual, and so on).

Is based on a single reference index investment.

Looks up the reference index investment's prices using the same price list and denomination for every reset.

Uses the same spread, multiplier, cap, and floor on all resets.

A Enter the date of the investment's first rate reset. The first rate reset date must be on or after the dated date of the investment. The investment's subsequent rate resets cycle off this date, based on the rate reset frequency. If the initial rate reset date is after the dated date, then enter the initial reset date and the rate reset frequency here on the investment's Variable Rate Schedule Info tab, and then go to the Variable Rate Schedule screen to enter the interest rate between the dated date and your first rate rest.

B Specify how frequently the investment's interest rate resets: Annually, Daily, Every 28 Days, Monthly, Quarterly, Semi Annually, Weekly.

C Specify how Geneva treats a reset date when the scheduled date falls on a non-business day: Following, Modified Following, Preceding, Modified Preceding, End of Month, or None. For details, see “Understanding Accrual Conventions” on page 61.

D If you enter values here, they will appear as default values in each new table row that you enter manually and click Add or Update, or they will be used to define automatically generated resets when you click Regenerate All Rates.

The earliest reset date in the table must be on or earlier than the investment’s dated date, or the transaction’s open date. You cannot delete this reset. For a rate based on a reference index, Geneva looks for a price for the index investment on this date as the base reset rate.

If you entered reset settings in the Automatic Rate Schedule Generation Settings section above, you can query the results in the Variable Rate Schedule table. Enter a Start Date and End Date and then click Refresh. You can also enter individual resets here, or manually edit the ones that are automatically generated. Click Update to save your changes.

E

ABC

D


How Geneva Accounts for Fixed-Income Transactions 71

How Geneva Accounts for Fixed-Income TransactionsAlthough Geneva can enter Interest Receipt transactions for you automatically, there are some instances where you will want to enter fixed-income transactions manually. Pay special attention to opening and closing transactions, as well as financing transactions (repo and reverse repo).

How Geneva Calculates Transaction Accrued Interest

For Receive Long/Short and Transfer transactions, Geneva calculates the accrued interest as of trade date (on receipt). For Transfer transactions, Geneva also calculates uncleared (original) accrued interest as of the date when you opened the tax lot. For all other transactions, Geneva uses the investment’s Coupon Custody on Trade” and “Accrues Thru Settle” settings to calculate accrued interest as follows. Select these settings on the Bond Specific or ABS Specific tab.

Current Face for Asset-Backeds

When you enter a transaction for an asset-backed, you enter the investment’s current face as of the settlement date in the Quantity field.

Because asset-backeds can have long settlement periods, you might not know an asset-backed’s settlement date factor when you enter a trade for it. You can either update the trade with the correct current face when you learn the investment’s factor on the transactions’ settlement date, or select the “Calculate Current Face at run time” check box in Systemwide Functional Settings. If you select this check box, you can leave the Quantity (current face), Trade Accrued Interest, and Net Trade Amount fields blank, to have Geneva calculate these values automatically using the factor of the latest GDTP Paydown transaction for the investment before the transaction’s settlement date. If you view an existing trade, Geneva displays this derived current face, as well as the accrued interest and net trade amount that it calculates from that current face. Geneva does not store these values in the trade, however, but instead recalculates them using the latest factor, every time that you view or report on the trade.

Note: If you enter a current face value in the Quantity field, Geneva records the transaction with the value that you entered, and does not recalculate it based on the GDTP Paydown transaction’s factor.

For closing transactions, Geneva validates the current face amount that you enter against the current face of the lots that the transaction closes (calculated as original face × paydown factor), with a tolerance of twice the investment’s Quantity Precision, as follows.

Coupon Custody on Trade Accrues Thru Settle Geneva calculates accrued interest as of

Cleared Cleared Actual settlement date.

Cleared Selected (4) Actual settlement date + 1 day.

Selected (4) n/a Trade date.


How Geneva Accounts for Fixed-Income Transactions72

Example: The tolerance for an investment with a Quantity Precision of 2 (two decimal places, or .01) would be .02.

Note: If you use a Multiway Pairoff transaction to pair off a long and a short lot of an asset-backed, where the two lots have slightly different current face values (for example, because you had bought the long lot earlier than the short lot and entered a Paydown transaction for it, which had a slightly different factor than was implied by the quantity of the Sell Short transaction), Geneva calculates that some current face, but no original face, of the asset-backed remains as current face in reserve.” The next Paydown transaction for the asset-backed closes this current face. If the difference between the two lots’ current face amounts is greater than five times the investment’s quantity precision, however, reports display a warning message for the Paydown.

Understanding Settlement Without Accrued Interest

Geneva allows you to define bonds that settle without accrued interest; that is, they begin accruing interest when the investment changes ownership (on settlement date), rather than trading with accrued interest. These are typically financing investments, rather than coupon-paying bonds. The investment’s issuer is responsible for keeping track of who owns the investment, and for dividing the coupon according to when ownership changes during the coupon period. These investments must have a record interval of zero days (that is, the investment’s record date is the same as its nominal date).

If the current face in the closing

Geneva Example

Transaction (Quantity) exceeds the current face of the closing lot by more than the tolerance

Rejects the closing transaction, because it would leave the closing lot with a negative current face.

The most likely cause for this is a missed Paydown transaction or an incorrect paydown factor.

A Sell with original face 100,000 and quantity 95,000 closes against a lot with original face 100,000 and current face 94,999.

This transaction would leave the closing lot with an original face of 0, and a current face of -1.

Lot exceeds the current face of the closing transaction (Quantity) by more than the tolerance

Accepts the transaction.

Assumes that the factor in the closing transaction is more current than the factor in the closing lots, and that the closing lots will subsequently be updated to reflect the more current factor, depleting its remaining current face.

A Sell with original face 100,000 and quantity 95,000 closes against a lot with original face 100,000 and current face 95,001.

This transaction leaves the closing lot with an original face 0, and a current face 1. Geneva assumes that you will later enter a paydown transaction for the closing lot that will adjust its current face to 95,000.

Transaction (Quantity) differs from the current face of the closing lot by less than the tolerance

Accepts the closing transaction, but automatically generates an Adjust Quantity transaction to adjust the current face of the closing lot to match the closing transaction.

A Sell with original face 100,000 and quantity 95,000 closes against a lot with original face 100,000 and current face 95,000.01.

This transaction generates an Adjust Quantity transaction to adjust the closing lot’s current face down by .01 to match the closing transaction.



On the Bond Specific tab, if you select the “Settle w/o Accrued Interest” check box, in transactions for that investment, the buyer does not pay accrued interest to the seller. Instead, the buyer begins accruing interest when the transaction settles. If the transaction’s contractual settlement date differs from its actual settlement date, Geneva assumes that the transaction settled on its contractual settlement date, but the issuer did not become aware of the transaction until its actual settlement date. The issuer pays the interest accrued between the contractual and actual dates to the seller, who then pays it to the buyer. On contractual settlement date, Geneva posts this accrued interest as interest payable due to buyer or interest receivable due from seller (or, for credit contracts, notational interest). You must use the Investment Income Settlement transaction, however, to close these payables and receivables when the buyer receives the interest. (The portfolio does not need to use Manual Income Settlement to do this.)

For more information on how this setting affects bank debt, see “Understanding Bank Debt” on page 168.

Withholding Taxes on Purchased/Sold Accrued Interest

On the Accounting Parameters screen, if you select the Withhold Purchased/Sold AI check box, the portfolio applies withholding taxes to purchased/sold accrued interest for Buy, Sell, Sell Short, and Cover Short transactions. Geneva uses the portfolio’s tax status and domicile country and the investment’s withholding tax type to look up the withholding and reclaim rates in the tax matrix of the issuing country. Geneva calculates these amounts and applies them to the transaction’s Net Cash Amount.

For details, on setting up withholding tax matrixes, see “Defining Countries and Tax Matrixes” in Getting Started with Geneva, Chapter 3, Setting Up Investments.

Note: Geneva does not settle reclaim receivables from withholding taxes on purchased/sold accrued interest.

Crossing Zero on Fixed-Income Investments

On the Accounting Parameters screen, if you select the Cross Zero on Debts/Credit Default Swaps check box, this affects following:

Talk to yourGenevaAdministrator

By default, Geneva also includes these withholding amounts in the transaction’s net settlement cash amount (that is, the settlement cash amount is net of the withholding on purchased/sold accrued interest). If you want Geneva to exclude withholding taxes from net settlement cash, your Geneva Administrator can set the “Withholding Tax Affects Net Settlement Cash Amount Date” setting in your geneva.ini file. Trades with trade dates on or after this date will exclude withholding taxes from net settlement cash. Maintaining Geneva provides your Geneva Administrator information about the geneva.ini file.



About Asset Servicing Transactions for Fixed Income

Use Geneva’s asset servicing transactions to enter income and expenses related to investments that your portfolios hold, or to enter other corporate actions that affect these investments. These transactions are also called dependent events, because whether they apply to a portfolio depends on whether the portfolio holds the affected investment. You can enter these transactions in individual portfolios, or in the Geneva Dependent Transaction Pool (GDTP) portfolio to apply them automatically to every portfolio that holds the affected investment.

The following dependent events affect fixed-income investments. Note that Geneva's Automatic Interest Generator automatically enters Interest Receipt, Mature, and final Paydown transactions for new investments that you define.

If you enter a Geneva

Buy transaction for a fixed-income investment in a custodian account that contains a short position in the same investment

Covers a portion or all of the short position in the investment.

Posts a credit to the accrued interest payable associated with the portion of the short position that is covered, which reverses out that portion of the expense.

Calculates the quantity of the long position (if any) that remains after the short position is covered, and posts JE lines for the proportional amount of paid accrued interest expense associated with the remaining quantity of the long position.

Sell transaction for a greater quantity of a fixed-income investment position than the specified custodian account has on hand or pending

Creates a new short position in the investment.

Credits the correct amount of accrued interest received for the original Sell transaction.

Calculates the quantity of the short position, and posts JE lines for the proportional amount of sold short accrued interest receipt for the new short position.

in HelpDetails

asset servicing transactions, overview

Call transaction

Defaulted bond transaction, about

Interest Receipt transaction

Mature transaction

Paydown transaction

Sink transaction

Use this transaction To record

Call A bond issuer calling a bond. Geneva enters Call transactions for you based on the Call schedule you define. For details, see “Understanding Call and Put Schedules” on page 47.

Defaulted Bond A bond or asset-backed going into or out of default.

Interest Receipt A coupon payment or expense for a fixed-income investment.

Mature A bond maturing.

Paydown A payup or paydown of an asset-backed investment. You can specify whether cash or income offsets the change to quantity and cost in Paydown transactions. For details, see “Understanding Asset-Backed Payment Options” on page 75.

Sink An issuer's redemption of a sinking fund Bond investment. Geneva enters Sink transactions for you based on the Sink schedule you define. For details, see “Understanding Sinking Fund Bonds” on page 47.



For more information about asset servicing transactions, see Chapter 2, “Asset Servicing Transactions and Adjustments,” on page 19.

Understanding Asset-Backed Payment Options

You use the Payment Options field on the ABS Specific tab to specify whether cash or income offsets the change to quantity and cost in Paydown transactions for the investment, as follows.

When you enter a Paydown transaction, its Payment Options field defaults to the asset-backed’s setting. If you select AlwaysPaymentInKind, the Paydown transaction displays Revenue Account and Expense Account fields, where you can specify the revenue or expense financial account that offsets the quantity and cost change. If you do not define the appropriate field, Geneva offsets the quantity and cost change against InterestReceipt for a paydown, or InterestExpense for a payup. This was formerly used to mimic the behavior of a TIPS or other index-adjusted bond. When used with a paydown, this debits revenue; when used with a payup, it credits expense. Geneva now supports an index-adjusted bond. On the Bond investment screen, click the Index Adjusted tab.

Financing Transactions

Geneva features financing transactions that you can use to fund a portfolio’s cash requirements (also called repurchase agreements or repos), and hedging transactions used to hedge against changes in currency exchange rates (also called currency trades, foreign exchange or FX contracts).

To access these transactions, choose Transactions ➤ Financing and Hedging ➤ <transaction>.

Lend Cash (Repo) and Borrow Cash (Reverse Repo) transactions require two investments, as follows.

in HelpDetails

Asset Backed investment

Paydown transaction

Payment Option Used for

For a paydown For a payup

Debits Credits Debits Credits

AlwaysInCash CMO “Z” bonds Cash Quantity/Cost

Quantity/Cost

Cash

AlwaysPaymentInKind Deprecated Revenue Expense

AssetBackedProcessing (Default) Other Cash Expense

Use this transaction To record the portfolio

Lend Cash (Repo) Lending cash and receiving an investment as collateral.

Borrow Cash (Reverse Repo) Borrowing cash using an investment as collateral.



Financing transactions use the following three dates:

Note: If Geneva cannot find a price for a bond or asset-backed used in a Lend Cash (Repo) or Borrow Cash (Reverse Repo) transaction, and the investment’s pricing currency is the same as its local basis currency, Geneva uses a price of 100.

Distributing Financing Transactions

You can use Geneva’s transaction distribution utilities to enter Lend Cash (Repo) or Borrow Cash (Reverse Repo) transaction in multiple portfolios or groups of portfolios.

To distribute a financing transaction

In this field Enter the investment that

Loan ID Geneva uses to determine the repo’s accrual calendar. This investment is a bond or asset-backed that has the Repo Agreement check box selected. Geneva does not generate Interest Receipt or Mature transactions for these investments. The transaction displays the investment’s accrual calendar settings on the Miscellaneous tab, where you can edit them.

Note: The loan investment does not determine the repo’s interest rate; you enter the interest rate as part of the transaction. A financing transaction can have a zero or negative interest rate.

Collateral Backs the loan. This can be any investment that you have defined. You can enter the serial number that you want to use for the collateral investment on the Miscellaneous tab (optional).

This date Defines when the

Trade date Portfolio and the counterparty agree to the transaction.

Open date Loan begins, and the collateral is received.

Close date Loan is repaid, and the collateral is returned. (Note: You can select the Open-ended check box to create an open-ended repo.)

in HelpDetails

Look up the transaction’s name in Geneva’s Help index.

1 Create a “model” transaction: The General tab of a transaction distribution utility has most of the fields that the corresponding transaction screen has. The exceptions are portfolio, strategy, loan amount, and commission, which you enter as part of the allocation process (step 2).

Note: If you enter miscellaneous revenues or expenses associated with the distribution, Geneva applies the full amount of each expense or revenue item to each of the distributed transactions.


Understanding Amortization 77

Understanding AmortizationIf a portfolio purchases a fixed-income investment above or below par value (that is, at a premium or discount), the portfolio can adjust the investment’s cost toward par value over time until it sells the investment, or until the investment matures. This process is called amortization. Amortizing a discount is called accretion.

2 Allocate the model transaction to your portfolios: Use the Allocation Info tab to distribute the model transaction among your portfolios. You enter the portion of the total loan amount and commission from the General tab to allocate to each portfolio in the distribution.

You can use the % field to enter the percentage of these amounts to distribute to each portfolio. You can also:

Use allocation group portfolios to distribute the transaction. For details, look up “allocation groups, portfolios” in the Geneva Help index.

Specify a different custodian account than that in the model transaction, as well as a strategy and fund structure (for distributions to strategy or fund portfolios).

3 Click Add to commit the distribution. After you commit it, you can click the Distributed Trans tab to view the transactions distributed to each portfolio.


Understanding Amortization78

The following sections describe:

The premiums and discounts that Geneva can amortize.

The methods that Geneva can use to amortize each type of premium or discount, and the options for those methods.

How to define amortization types, settings, and methods in Geneva, and apply them to investments and accounting parameter sets.

Note: Limitations in the TIPS SSC software prevent Geneva from calculating accurate valuations or amortization for investments with negative interest rates.

Understanding Which Values Geneva Amortizes

Geneva recognizes five amortizable quantities. You do not need to specify an amortization setting for each value—specify just the ones your firm uses for reporting. If you do not specify a setting for one of these parameters, then Geneva will not amortize the discount or premium in question.

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Amortization, accretion, and accrual

Geneva’s amortization settings can be applied to both amortization of premium and accretion of discount. For information about the Internal Revenue Service (IRS) amortization requirements, see publications 550 and 1212. The methodology used by the taxpayer depends on the type of investment, the investment’s issue date, the investor’s acquisition date, and other options specified by the taxpayer. Furthermore, the treatment of income versus capital gain/loss can, under specific circumstances, vary dependent on one or more of the preceding characteristics.

Unless otherwise specified, in this document the term amortization refers to both the accretion of discount and the amortization of premium.


Understanding Amortization 79

When you define amortization settings, you specify how your portfolios amortize each of these quantities:

A Closer Look at Amortizable Values

This diagram illustrates the values that Geneva amortizes.

For more information about these values, see the table on the next page.

A

B

1,000

800Original Issue

Discount (OID)

600

400

200

1,200

Maturity Price

Original IssuePrice

Relative Premium

Relative Discount

Total Discount

Adjusted Issue Price (AIP)

Total Premium

q Tip: For OID bonds, the market discount is equal to the relative discount. For non-OID bonds, the market discount is equal to the total discount.

Quantity For lots where the

OID Issue price is non-zero and less than maturity price.

TotalPremium

Settlement price exceeds the maturity price. The equivalent IRS term is “premium.”

TotalDiscount

Maturity price exceeds the settlement price. The equivalent IRS term is “market discount” for a lot without OID, or “acquisition discount” for a lot with OID that does not need to be amortized.

Example: T-bills purchased in the secondary market should be amortized on the basis of Total Discount, regardless of the existence of OID. (The purchaser may not even know the original issue price.)


Understanding Amortization80

Understanding Amortization Methods

The IRS mandates two general amortization methods, scientific and linear.

RelativePremium

Settlement price lies between the adjusted issue price (on settlement date) and the maturity price. To determine whether this condition exists, Geneva first computes the amount of OID amortization as of settlement date using the selected OID amortization method. The equivalent IRS term is “acquisition premium.”

The adjusted issue price at settlement is the original issue price plus the amount of OID amortization on settlement date. If the settlement price is greater than the adjusted issue price at settlement, relative premium equals the settlement price minus the adjusted issue price.

RelativeDiscount

Settlement price lies below the adjusted issue price on settlement date. To determine whether this condition exists, Geneva first computes the amount of OID amortization as of settlement date using the selected OID amortization method. The equivalent IRS term is “market discount.”

The adjusted issue price at settlement is the original issue price plus the amount of OID amortization on settlement date.

Method Description

Linear Straight-line interpolation from issue or settlement date to maturity. Linear amortization methods mandated by the IRS differ in the amount of time used as a basis for interpolation. In some situations, quantities are pro-rated daily; in others, they are pro-rated monthly.

Scientific Constant yield. The exact amortized basis must be computed on each coupon date. The IRS then mandates that for intra-period transfers, the amount of amortization is interpolated in a linear fashion between the two surrounding coupon dates. As with linear amortization, the amount of time used as the basis for this interpolation can be either daily or monthly

Quantity For lots where the


Setting Up Amortization Rules in Geneva 81

Setting Up Amortization Rules in GenevaGeneva lets you create sets of amortization rules that allow you to assign a different amortization method to each type of fixed-income investment that you define. To set up amortization in Geneva, you must define the following:

1 Amortization types, categories that describe how your investments amortize.

2 Amortization settings, the sets of methods that determine how an investment amortizes original issue discount (OID), total premium, relative (acquisition) premium, total (acquisition) discount, and relative (market) discount.

3 Amortization election matrixes, tables that link each amortization type to its corresponding amortization settings.

You then assign an amortization election matrix to each accounting parameter set that is used by a portfolio holding fixed-income investments. When Geneva calculates amortization for an amortizable investment, it looks up the investment’s amortization type in the portfolio’s amortization matrix to see which amortization settings it should use. (If the portfolio’s

A Closer Look at Amortization Methods

This diagram compares Geneva’s amortization methods.

A Linear: Each period, Geneva amortizes an equal amount of premium or discount.

B Scientific: Each period, Geneva amortizes an amount that results in a constant yield to maturity over the life of the investment, even as the amortization-adjusted “carrying value” or “cost book” increases or decreases as it approaches the par value.

A

B


Setting Up Amortization Rules in Geneva82

amortization election matrix does not include the investment’s amortization type, Geneva does not amortize the investment.)

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Theoretically, you could have an amortization type for each different kind of fixed-income investment you hold, amortization settings for each combination of amortization methods you use, and a single exhaustive election/matrix used by all portfolios that links each investment’s amortization type to its corresponding amortization settings. This is designed so that within a single portfolio, different investments can use different amortization methods. And, in a second portfolio, the same list of investments could use an entirely different combination of amortization methods.

! Important: If the portfolio’s amortization election matrix does not include the investment’s amortization type, then Geneva does not amortize the investment.



To define an amortization matrix

How do I set up an amortization matrix?

� Define your amortization types.

� Define your sets of amortization settings.

� Assign an amortization election matrix to each accounting parameter set for portfolios that amortize.

� Match each amortization type to the corresponding set of amortization settings.

� Assign an amortization type to each of your amortizable fixed-income investments.

in HelpDetails

amortization types, defining

amortization settings, defining

amortization matrixes, defining

1 Choose Define ➤ Accounting ➤ Amortization ➤ Type. Enter an ID and description for each of your amortization types.

2 Assign an amortization type to each fixed-income investment that you want to amortize. For details, see “A Closer Look at Fixed-Income Investment Preferences” on page 45.



3 Choose Define ➤ Accounting ➤ Amortization ➤ Settings. Enter an ID and description, and specify whether callable and putable bonds of this type use yield-to-worst/yield-to-best to amortize. Then, for each type of premium or discount, specify:

The method used to amortize that type of premium and discount.

Whether the portfolio reports the amortization while it holds the investment (AccruePeriodically) or only after it closes the investment (RecognizeOnDisposal).

For descriptions of these methods and options, see “Understanding Amortization Methods” on page 80.

4 Choose Define ➤ Accounting ➤ Amortization ➤ Election/Matrix. Enter an ID and description for the matrix, and then pair each of your amortization types with the amortization settings that portfolios that use the matrix use to amortize that type of investment.

5 Choose Define ➤ Accounting ➤ Accounting Parameters. Assign an Election/Matrix to each accounting parameter set that is used by a portfolio holding an amortizable fixed-income investment.



Choosing amortization methods

On the Amortization Settings screen, you can see that the two amortization methods, linear and scientific, have several sub-methods. For each amortizable value, assign one of the following amortization methods:

Note: If, on a valuation date, an investment’s amortized price exceeds its issue or purchase price, Geneva does not display amortization for the investment. For example, this can occur if the valuation date is near a coupon nominal date for the investment.

Method Geneva calculates

LinearDaily One day’s accrual as the difference between the purchase price and the redemption value of the investment, divided by the number of days between the settlement date of the purchase and the redemption date.

Example: You buy a bond maturing in one year at a price of 97. Geneva divides the discount ($3,000) by the number of days until redemption (365) for a daily accrual amount of $8.22

LinearMonthly One month’s accrual as the difference between the purchase price and the redemption value of the investment, divided by the number of months between the settlement date of the purchase and the redemption date, with any partial months pro-rated. Geneva then divides each month’s accrual by the number of days in that month to calculate one day’s accrual.

Example: You buy a bond maturing in 11 months at a price of 97. Geneva divides the discount ($3,000) by the number of months left before redemption (11) to calculate a monthly accrual of $272.73. Geneva then divides this amount by the number of days in each month to calculate the daily accrual.

LinearPeriodic One coupon period’s accrual as the difference between the purchase price and the redemption value of the investment, divided by the number of coupon periods between the settlement date of the purchase and the redemption date, with any partial periods pro-rated. Geneva then divides each period’s accrual by the number of days in that period to calculate one day’s accrual.

Example: You buy a bond with two coupon payments remaining until redemption at a price of 97. Geneva divides the amount of the discount ($3,000) by the number of coupons left before redemption (2) to calculate a period accrual of $1500. Geneva then divides this amount by the number of days in each coupon period to calculate the daily accrual.

ScientificYield This method calculates amortization using the purchase yield of the investment. The amortization amount for each period is recalculated on each coupon date, and then Geneva divides this amount by the number of days in the period to calculate the daily accrual during the period. This method is accepted by the IRS and is also known as the “YTM method.”

Amortization amount for a period =((Amortized cost × YTM)/Coupon periods per year) - Coupon interest for the period

Daily accrual = Amortization for the period/number of days in the period

Note: For zero coupon bonds, Geneva uses the TIPS SSC “perfect yield” method.



How amortization methods affect the amortizable values

The following table shows how Geneva’s amortization methods affect each type of premium or discount:

Choosing amortization options

On the Amortization Settings screen, for each amortization method, Geneva has two options for displaying premiums or discounts on reports, and another option, RecognizeOnDisposal to specify that Geneva not recognize the amortization until you close the lot.

Premium/Discount Methods

OID Linear methods compute this amortization from issue date to maturity.

Scientific methods compute “yield on issue” using the issue price and date, and then use this value in a standard constant yield algorithm to determine the amortized original issue basis at each coupon date.

Total Premium

Linear methods compute this amortization from settlement date to maturity.

Scientific methods compute “yield on cost” using the gross (“dirty”) settlement price and date, and then use this value to determine the amortized cost basis at each coupon date.

Relative Premium


Scientific methods compute the amount of OID amortization for both settlement and valuation date. Geneva then calculates “yield on cost” as for Total Discount. A standard constant yield algorithm uses the yield on cost to determine the amortized cost basis as of valuation date.

Geneva then computes the Relative Premium as of valuation date (cost basis - amortized issue basis on valuation date). Geneva then subtracts the original (settlement date) Relative Premium from the Relative Premium on valuation date to produce the amount of relative premium amortization.

Total Discount


Scientific methods compute “yield on cost” using the gross (“dirty”) settlement price and date, and then use this value to determine the amortized cost basis at each coupon date.

Relative Discount


Scientific methods compute the amount of OID amortization for both settlement and valuation date. Geneva then calculates “yield on cost” as for Total Discount. A standard constant yield algorithm uses the yield on cost to determine the amortized cost basis as of valuation date.

The Relative Discount as of valuation date is then computed (cost basis on valuation date - amortized issue basis on valuation date). Geneva then subtracts the original (settlement date) Relative Discount from the Relative Discount on valuation date to produce the amount of relative discount amortization.



Choosing how Geneva amortizes the call/put schedule

By default Geneva calculates the yield until the maturity date. In cases where the bond is issued with a call or put option, or a schedule of call or put options, Geneva can use the call date or put date to calculate the yield. If you enter a call schedule, put schedule, or a sink schedule for a fixed-income investment, Geneva can use these schedules and the associated redemption prices to calculate the Yield To Best or Yield to Worst.

On the Amortization Settings screen, specify which accounting settings Geneva should use for a bond with a call or put schedule. Geneva can determine whether or not to use yield-to-worst call and yield-to-best put to amortize the bond’s premium or discount, as follows.

Geneva calculates yield based on all remaining redemption dates and prices, and then reports the one you specified (worst, best, or, if you specified neither, the yield to maturity). Geneva calculates the yield based on each possible redemption date and price, and then identifies the best and worst yield.

For Select To have Geneva display

Total Discount

AccruePeriodically Amortization for non-OID investments purchased below their maturity price.

AdjustOID Amortization for all investments purchased below their maturity price.

Total Premium

AccruePeriodically Amortization for all investments purchased above their maturity price.

AdjustOID Amortization for all investments purchased above their maturity price.

Relative Discount

AccruePeriodically Amortization for OID investments purchased below their adjusted issue price (AIP). The amount to amortize is the difference between the purchase price and the OID.

AdjustOID No amortization.

Relative Premium

AccruePeriodically Amortization for OID investments purchased above AIP but below their maturity price. The amount to amortize is the difference between the purchase price and the AIP.


OID AccruePeriodically OID amortization for OID investments purchased below their maturity price. The amount to amortize is the difference between the issue price and the maturity price.


Select To have Geneva amortize

Amortize Premium Using Yield-to-Worst/Yield-to-Best

Premiums based on the yield to worst call or best put.

Amortize Discount Using Yield-to-Worst/Yield-to-Best Discounts based on the yield to worst call or best put.


Understanding Defaulted Fixed-Income Investments88

Geneva’s De Minimis amortization threshold

Following IRS guidelines, Geneva ignores OID if it is below a certain De Minimis threshold. Geneva calculates the De Minimis amount using this formula:

De Minimis = 0.0025 × maturity price × years to maturity

If you purchase a bond after the original issue date, Geneva compares the bond’s purchase price to the Adjusted Issue Price (AIP) and amortizes any discount or premium. The Adjusted Issue Price is the original issue price of the security plus all of the OID accreted up to that point in time. Geneva calculates AIP using this formula:

AIP = Original Issue Price + All Previously Accrued OID

How Accounting Parameters Affect Accrual/Amortization

On the Accounting Parameters screen you can specify the Amort/Accrual Appraisal for fixed-income investments. The Amort/Accrual Appraisal setting defines the date as of which Geneva determines amortization and interest accruals for reports. Geneva uses the set of accounting parameters’ business calendar to determine the day count. The options for the Amort/Accrual Appraisal setting are:

Understanding Defaulted Fixed-Income InvestmentsA fixed-income investment is said to go into default when it ceases to accrue interest, amortize premium, or accrete discount. This process is initiated when you enter a Defaulted Bond transaction. You can enter this transaction for any of the following investments:

Choose To have reports amortize and accrue as of the Example

Current Day Report date. Does not include accruals for that day, but does include the prior day’s accruals. Geneva calculates amortization and accrual as if the investment settled on that date.

Report date is Monday. Geneva includes Sunday’s accrual, but not Monday’s.

Next BusinessDay

Next business day. Includes accruals up to but not including the next business day. Geneva calculates amortization and accrual as if the investment settled the next business day.

Report date is Friday. Geneva includes Friday’s, Saturday’s, and Sunday’s accruals, but not Monday’s.

Modified Next Business Day

Next business day unless that date is in the next calendar month; in which case Geneva accrues through the last calendar date of the current month. Geneva calculates amortization and accrual as if the investment settled on the next business day or the last calendar day of the current month.

Report date is Friday and the month ends on Saturday. Geneva includes Friday and Saturday’s accruals, but not Sunday's.

Next CalendarDay (default)

Next calendar day. Includes accruals through the report date. Geneva calculates amortization and accrual as if the investment settled the next calendar day.

Report date is Friday. Geneva includes Friday’s accruals, but not Saturday’s.


Understanding Defaulted Fixed-Income Investments 89

Bond.

Asset-backed.

Credit facility.

Credit default swap (CDS).

How Geneva Accounts for Standard Default Scenarios

Typically, when a fixed-income investment goes into default, it stops accruing interest, amortizing premium, or accreting market discount. The simplest way to account for this is with the Defaulted Bond transaction. When you enter this transaction, Geneva deletes the interest accruals for the coupon period leading up the Defaulted Bond transaction, and any amortization that occurred from the purchase date forward.

This lets you write off the security and remove the interest accruals and amortization. You can also specify that Geneva ignore the defaulted investment's maturity date. The Automatic Interest Generator will not enter a Mature transaction for the investment, and you can trade it after its maturity date.

in HelpDetails

Defaulted Bond transaction, about

Defaulted Bond transaction, entering

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asset servicing transactions, overview



A Closer Look at How the Defaulted Bond Transaction Works

When you enter the in-default transaction

The diagram below describes a common default scenario, where an investment goes into default, and then subsequently goes back out of default.

When you enter a Defaulted Bond transaction with an In Default date, Geneva does the following:

Stops accruing interest as of the current coupon period.

Deletes accrual that has already occurred for the current coupon period.

Stops amortizing premium or accreting discount as of the purchase date.

Stops generating GDTP Interest Receipt transactions as of the beginning of the current coupon period.

When you enter the out-of-default transaction

When the investment passes back out of default, it resumes accruing interest beginning with the most recent previous coupon date. On the next coupon date, Geneva records an Interest Receipt transaction for the full coupon, including the defaulted accrual going as far back as the previous coupon date. When you enter a Defaulted Bond transaction with an Out Default date, Geneva does the following:

Resumes accruing interest as of the beginning of current coupon period.

Restores accrual that has already occurred for the current coupon period. Defaulted interest from prior coupon periods is not restored.

Resumes amortizing premium or accreting discount as of the purchase date.

Resumes generating GDTP Interest Receipt transactions as of the beginning of the current coupon period.

Geneva enters a full coupon payment for the current period, even if the Out of Default date was in the middle of a coupon period.

If you run a report using a period end date:

Before the out-of-default date, Geneva shows no accrued interest for the defaulted period.

After the out-of-default date, Geneva shows accruals starting at the beginning of the coupon period in which you entered the out-of-default date.

Coupon

CouponDate

No coupon

Interest Accrual

No coupon

CouponDate

No Accrual

CouponDate

No Accrual

In-defaultdate

No Accrual

Coupon

CouponDate

Out-of-default date

Interest Accrual

Coupon

Interest Accrual

No coupon

CouponDate

No Accrual

CouponDate

Interest Accrual

In-defaultdate

No Accrual



Customizing How Geneva Accounts for Default Scenarios

The previous section described how to account for a standard default scenario where you write off the defaulted investment and remove the interest accruals and amortization. Geneva can also account for scenarios where you preserve and carry forward the previous accrual and amortization as of the in-default date defined on the investment’s Suspension Schedule tab. Use this tab to account for scenarios where:

The accrual and amortization are defaulted on different dates, or they come out of default on different dates.

You keep the investment’s cost or accrued interest on the books to track the unrealized gain/loss on the investment until you finally write it off or dispose of it.

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How the default transaction and suspension schedule work together

By using both the Defaulted Bond transaction and the Suspension Schedule tab together, you can customize how Geneva accounts for defaulted accrual, amortization, or both.

When you specify an Into Default date on the Suspension Schedule tab, Geneva accounts for the interest or amortization accrued from the in default date forward using the InDefault financial account. Note that on this tab you can specify unique dates for suspending accrued interest and amortization.

When you enter a Defaulted Bond transaction, Geneva stops accruing interest as of the most recent prior coupon date.



A Closer Look at the Suspension Schedule

After you enter a Defaulted Bond transaction for a defaulted fixed-income investment, use the investment’s Suspension Schedule tab to specify the days on which accrual or amortization are suspended. These may differ from the default date you entered in the Defaulted Bond transaction.

If the investment subsequently goes out of default, enter another Defaulted Bond transaction with an Out of Default date, and then use this tab to resume accrual and amortization.

A Enter the date Geneva should stop accruing interest.

B If the investment subsequently goes out of default, enter the date Geneva should resume accruing interest.

C Enter the date Geneva should stop amortizing premium or discount.

D If the investment subsequently goes out of default, enter the date Geneva should resume amortizing premium or discount.

A

B

C

D



A Closer Look at How the Suspension Schedule Tab Works

This diagram illustrates what happens when you define the In Default date on the investment’s Suspension Schedule tab, and then again the Out of Default date. When you enter an In Default date on the Suspension Schedule tab, the following happens for the period of the default:

Geneva stops accruing interest as of the Into Default date but carries forward the accrued interest already recorded until the investment reaches an Out of Default Date.

Geneva stops amortizing premium or accreting discount as of the Into Default Date and carries forward the amortization already recorded until the investment reaches an Out of Default Date.

Geneva records accrued interest or amortization after the In Default date in the InDefault financial account.

Geneva stops generating GDTP Interest Receipt transactions for the investment.

You can enter different dates on the Defaulted Bond transaction and the Suspension Schedule tab, both when the investment goes into default and also when it comes back out of default again.

The diagram below illustrates the same investment as above, but in this case you specify an Out of Default date that is one second after the date you entered for the In Default date. Do this if the bond comes out of default and resumes accruing interest uninterrupted as if the default never happened.

In this scenario, the following happens:

Geneva resumes accruing interest retroactively as of the Out of Default date you enter and accrues interest as if the default never happened.

Geneva enters accrual JE lines for the period of default.

Geneva enters an interest payment for the full coupon amount.

Coupon Payment

Interest Accrual

Coupon Period

DefaultDate

DefaultedCoupon Date

Out ofDefault Date

InDefault AccruedInterestLong

Partial CouponPayment

Interest Accrual

Coupon Period

InDefault AccruedInterestLong

Coupon Payment

Interest Accrual

Coupon Period

In DefaultDate

Full CouponPayment

Interest Accrual

Coupon Period

Out of Default Date

Interest Accrual

Retroactive Coupon Payment


Using the Financial Calculator94

Using the Financial CalculatorYou can use Geneva’s Financial Calculator to compute a fixed-income investment’s yields, accrued interest, amortization, accrual factors, and other information. The Financial Calculator can analyze investments that you have already defined, or model new investments.

Note: Geneva calculates amounts for a unit bond, not for the position in the bond that a portfolio holds.

To use the calculator, you specify either a fixed-income investment that you have already defined, or settings for a theoretical investment, and the:

Settlement, trade, valuation, or period end date for calculating accrued interest.

Settlement and valuation date and price, for calculating yields and amortization.

(Optional) Portfolio whose amortization settings you want the calculator to use (from the portfolio’s accounting parameter set).

The Financial Calculator offers three ways to calculate accrued interest.

To use the Financial Calculator

Select To have Geneva calculate interest accrued up to the

Report Period end date.

Transaction Settlement date if the “Coupon Custody on Trade” check box is cleared.

Trade date if the “Coupon Custody on Trade” check box is selected.

Accrual factor Valuation date. (Note: Geneva does not calculate interval (negative) accrued interest for accrual factors.)

in HelpDetails

Financial Calculator screen

1 Choose Tools ➤ Financial Calculator.


Using the Financial Calculator 95

2 Select the accrued interest type and enter accrued interest and analytic dates and prices. You can also:

Select a bond, or model one on the Bond Specific and Preferences tabs.

Select the portfolio whose amortization matrix you want to use, or model a matrix on the Preferences tab. For details, see “To define an amortization matrix” on page 83.

3 Click Run Query .

The Financial Calculator Results screen appears. Click a Show button to have the upper-right-hand corner of the dialog box display pertinent information about how Geneva calculated the value in that field.

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