When investors buy fixed-income securities, they often purchase them at prices above or below face (or par) value, depending on what has happened in the market. Buying higher than face value is known as buying at a premium. Buying less than face value is known as buying at a discount.
Amortization or accretion calculations are used to adjust the cost basis from the purchase amount to the expected redemption amount. This spreads out the gain or loss over the remaining life of the bond instead of recognizing the gain or loss in the year of the bond’s redemption.
To open the Amortization Wizard, go to Tools, Global Transaction Wizard, and then select Amortization Wizard.
To set amortization options for a client or account, do the following:
In the Select Clients/Accounts field, click Find. The Find Client/Prospect dialog box opens.
Click the name of the client for whom you want to generate transactions, then click OK. The Select Accounts dialog box opens.
Click Go to list all the client's accounts.
Double-click to select the account(s) you want to include, then click OK.
If you have run the Amortization Wizard before, the Start Date field defaults to the end date from the previous instance. If you have not run the wizard before, Start Date field defaults to the current date. This can cause a one-day overlap. The date would need to be changed to one day later for continual amortization. Click the drop-down field and use the calendar to select a different start date, if desired.
Note: The wizard generates by Trade Date, not Acquisition Date. For the cost basis to amortize correctly, the per share cost basis on the original Deliver-In of the bond should be what the cost was on the Trade Date.
Click the End Date drop-down field and select an end date for amortization transaction generation. The default selection is the current date.
In the Security Type to Amortize area, the Fixed Income, Mortgage-Backed, and CMO check boxes are checked by default. Un-check the corresponding boxes if you do not want to generate amortization transactions on any of these security types.
The Amortize Bond Acquired at drop-down field defaults to Both. Select Premium or Discount to generate amortization transactions for only one type of bond.
The Amortize to Date field defaults to Security Default Amortize to Date. To override the security-level setting, click the drop-down menu and select Maturity Date or Call Date.
In the Amortization Reported as area, the Amortization as and Accretion as fields default to Default Tax Setting. You can select None or Interest. (For more information on what these options mean, see Amortization and Accretion.)
The Post transactions to account option is checked by default. If you want to view the amortization transactions in the Global Transactions Blotter before posting them to the account(s), un-check this option.
Click Next. The transactions are generated and a confirmation message appears.
Note: The Amortization Wizard will not generate transactions if the fixed income securities are missing Payment Frequency. A message will appear identifying the security that needs updated with the Payment Frequency. However, this message only identifies one bond at a time, so if there are multiple bonds with the missing data, the wizard would need to be run multiple times to reveal the missing data for each one.