1.2 Computation of Net Discount Accrual Amount for a Processing Day
This topic describes the details on computation of net discount accrual amount, IRR calculation and IRR re-calculation.
Computing Net Discount Accrual Amount
The following details are stored in the system during discount accrual:
- Outstanding contract amount
- Outstanding arrears interest accrued
- Discounted interest to be accrued
- Premium to be accrued
- Discount to be accrued
- Interest adjustment accrued already
- Premium accrued till date
- Discount accrued till date
- • All future cash flows are discounted to the processing day using the IRR effective as of the processing day, and the net present value (NPV) of the contract as of the processing day is obtained. The NPV is calculated based on the acquisition type as follows:
- If the acquisition type is ‘Discount’, NPV is given by: NPV = outstanding Money Market contract amount + outstanding arrears interest accrued + outstanding acquired interest – (discounted interest to be accrued – discounted interest accrued) – (discount to be accrued - discount accrued). If the acquisition type is ‘Premium’, the NPV is given by: NPV = outstanding Money Market contract amount + outstanding arrears interest accrued + outstanding acquired interest - (discounted interest to be accrued – discounted interest accrued) + (discount to be accrued - discount accrued).
- If the acquisition type is ‘Par’, the NPV is given by: NPV = outstanding Money Market contract amount + outstanding arrears interest accrued + outstanding acquired interest – (discounted interest to be accrued – discounted interest accrued) + (interest adjustment accrued already + interest adjustment accrued).
- Outstanding arrears accrued interest is only for arrears (bearing) type contracts.
- The till date discount accrual amount is computed using the following expression: Where
- TDAn represents the Till Date Discount Accrual for nth Accrual Date
- NPVn , the Net Present Value of the contract as of nth Accrual Date
- Pn, the Outstanding Principal of the contract as of nth Accrual Date
- DTAs, the Discount to be accrued as of current IRR Effective Date
- AIn, the Current Period Accrued Interest as of nth Accrual Date, and
- DAs, the Discount Accrued as of current IRR Effective Date
- The difference between the ‘Till date discount accrual’ amount as of the previous processing day and the ‘Till date discount accrual’ amount as of the current processing day is the ‘Net Discount accrual’ amount that is realized as income as of the processing day. The expression used would be, Where \:
- NDAn represents the Accrual for nth Accrual Date,
- TDAn, the Till Date Discount Accrual for nth Accrual Date and
- TDAn-1, the Till Date Discount Accrual for n-1th Accrual Date.
IRR calculation and IRR Re-calculation
Internal Rate of Return (IRR) calculation does not happen in the below mentioned cases:
- Initial stage of a contract
- Payment
- Contract closure
- Value dated amendment of a contract maturity date
- Floating interest rate revision
- Partial prepayment to a principal amount for a contract
- New charge on a contract, payable by customer
- Amendment of the Interest to Date
- Amendment of the interest rate
- Partial prepayment to an interest amount
Note:
The above events pertain to bearing/arrears type of contracts. For discounted/true discounted type of contracts where the interest is collected in advance, IRR recalculation is done with a new effective date during the following events:
- A partial prepayment to a principal amount
- New charge on a contract, payable by your Customer
Note:
IRR recalculation is undone during reversal of a partial prepayment.IRR recalculation is not done during the following events:
- When a payment is overdue
- For a regular payment
- For a full prepayment
- Amendment of a contract amount
Parent topic: Defining Discount Accrual Classes