18.4 Interest Method for Computing Coupon Interest

This topic describes the interest method for computing coupon interest.

Apart from the above-mentioned method for calculating the interest, you can also use the ACT/ACT–ISMA Interest Method and ACT/ACT–FRF Interest Method

ACT/ACT–ISMA Interest Method

The ACT/ACT–FRF Interest Method is applied for periodic coupons using the following coupon: Coupon Interest = Nominal x (Coupon Rate/Number of Coupons) x (Number of elapsed Days/ Number of days in coupon period) For ACT/ACT–ISMA, you need to maintain the following parameters:

• Numerator Method – Any of the option in the list
• Denominator Method – Actual
• Denominator Basis – Per Annum
• Rate Denomination Basis – Per Coupon Period

Specify denominator method for calculating the accrual and liquidation amount as follows:

Denominator Method

Select the denominator method from the adjoining drop-down list. This list displays thefollowing values:

• 360
• 365
• 364

The values of Denominator Method maintained in ‘Securities Instrument Definition’ screen are used for accrual and liquidation Interest amount calculation for Bonds for a given security.

366 Basis

While maintaining the Interest related details in the Security Definition screen, you need to specify the whether the system should use leap year or leap date for calculating the interest.

• Leap Year (Y) – Indicates that the system will compute the interest based on the number of calendar days in the year.
• Leap Date (D) – Indicates that the system will use the ACT/ACT–FRF Interest Method to compute the interest.

Note:

This field is enabled only if the Denominator Basis value is Per Annum and the Denominator Method is ACTUAL.

ACT/ACT–FRF Interest Method

In ACT/ACT–FRF Interest Method, the Numerator will be the actual number of days betweentwo coupon dates and the denominator will be 366 under the following cases:

• If 29th February falls between the duration of two coupon dates (i.e. previous coupon date and next coupon date)
• If the previous coupon date and the next coupon date fall in different years (annual frequency, next coupon dates in immediate subsequent year of previous coupon date)
• If the coupon schedule is not periodic and spreads across multiple years. The system will apply 366 as the denominator for all the years for computing the day count even if one instance of 29th February falls in between the coupon dates.