6.5.4 Discount Accrual Processing - an Example

Let us consider a Loan contract with following parameters.

Table 6-1 Parameter

Loan Amount	USD 1,000,000
Value Date	01-Jan-2003
Maturity Date	01-Jan-2004
Interest Rate	12%
Commission Rate	6%
Commission Value Date	01-Jan-2003
Interest Repayment Frequency	Monthly (Month Ends)
Principal Repayment Frequency	Bullet
Interest Basis	Actual/365
Discount Accrual Day count Numerator Method	Actual
Discount Accrual Day count Denominator method	365

Table 6-2 Interest Payment method

Interest Payment Method	Bearing
IRR	20.30%

The projected cash flow for the contract would be:

Table 6-3 Cash Flow

Due Date	Component	Amount (USD)
01-Jan-2003	Principal	-1,000,000
01-Jan-2003	Commission	60,000
01-Feb-2003	Interest	10,191.78
01-Mar-2003	Interest	9,205.48
01-Apr-2003	Interest	10,191.78
01-May-2003	Interest	9,863.01
01-Jun-2003	Interest	10,191.78
01-Jul-2003	Interest	9,863.01
01-Aug-2003	Interest	10,191.78
01-Sep-2003	Interest	10,191.78
01-Oct-2003	Interest	9,863.01
01-Nov-2003	Interest	10,191.78
01-Dec-2003	Interest	9,863.01
01-Jan-2004	Interest	10,191.78
01-Jan-2004	Principal	1,000,000

If the Discount Accrual Processing Date is 15-Feb-2003, the processing for discount accrual is as follows:

1. NPV of the contract is computed as of 15-Feb-2003 by discounting the future cash flows as shown below:

   Table 6-4 NPV of Contract

   Due Date	Amount	(di-d1)/D	1+IRR	(1+IRR)^( (di-d1)/D)	Discount CF
   01-Mar-03	9205.48	0.038	1.203	1.0071	9140.46
   01-Apr-03	10191.78	0.123	1.203	1.023	9962.22
   01-May-03	9863.01	0.205	1.203	1.0387	9495.54
   01-Jun-03	10191.78	0.29	1.203	1.0551	9659.27
   01-Jul-03	9863.01	0.373	1.203	1.0713	9206.78
   01-Aug-03	10191.78	0.458	1.203	1.0882	9365.53
   01-Sep-03	10191.78	0.542	1.203	1.1054	9219.70
   01-Oct-03	9863.01	0.625	1.203	1.1224	8787.80
   01-Nov-03	10191.78	0.71	1.203	1.1401	8939.02
   01-Dec-03	9863.01	0.792	1.203	1.5755	8520.56
   01-Jan-04	1010191.7 8	0.877	1.203	1.1759	859105.75
   -	-	-	-	-	951402.94

   The NPV of the Contract as of 15-Feb-2003 = USD 951,402.94

2. IRR Start date = 01-Jan-2003

   Outstanding Principal as of 12-Feb-2003 = USD 1,000,000

   Discount to be accrued as of 01-Jan-2003 = USD 60,000

   Accrued Interest as of 15-Feb-2003 = USD 4602.74

   Discount Accrued as of 01-Jan-2003 = USD 0.00

   Previous process till date = 14-Feb-2003

   Till Date Accrual as of 14-Feb-2003 (TDA_n-1) = USD 6647.43

   
   
   

   TDA_n = 951402.94 – (1000000-60000)-4602.74+0

   TDA_n = 6800.2

   Net Discount Accrual = TDA_n – TDA_n-1

   Net Discount Accrual = 6800.20 – 6647.43

   Net Discount Accrual = 152.77