How to Calculate Amortization and Income on the Investments or Financial Instruments Classified as Held to Maturity (HTM)

Source http://internalauditworkingpapers.weebly.com/

How to Calculate Amortization and Income on the Investments or Financial Instruments Classified
as Held to Maturity (HTM)

Only the Investments Classified as Held to Maturity are recorded in books at amortized Cost.

Q.1 When Amortization/Discount is required?

Ans. Amortization is required when securities (Investments) are purchased at the price higher than its Face Value.

And Discount calculation is required when the Securities (Investments) are purchased at the price lower than its Face Value.

Q#2 What is the Effect of Amortization/Discount.

Ans#2 Amortization is treated as an Expense and Discount is treated as Income.

Q#3 How to Amortize the premium/(discount) on the Investments (securities).

Ans. Premium/(discount) on Investment are to be amortized over the Maturity period of the Investment.

Key Terms:

Premium:   The Excess amount paid on the purchase of any Securities (Investments).

Discount: The Securities purchased at less than the Face value (at Discount)

Amortization = Coupon interest amount – Interest calculated at effective rate (at IRR).

Coupon interest: is interest calculated at the coupon rate, which is actually received.

Effective interest: is calculated using the (IRR=Internal Rate of Return)

IRR (Internal Rate of Return):  is the rate where the return is Zero. (the rate of return where no loss and no profit arise.)

Face Value it is the security’s actual value/Price.

Purchase Cost:  is the cost at which securities are purchased (Ex. A security having face value of 100,000 is purchased at the cost of 125,000 the difference between the face value and cost is the premium paid = 25,000)

Formulas:

Amortized cost: the value of Security after amortization (Purchase cost/Opening Amortized Cost – amortization for the period = amortized cost as at the period ended)

Coupon interest = Face Value * Coupon Interest Rate.

Effective Interest = Purchased Cost/Amortized Cost * Effective Interest Rate (IRR)

Amortization/(Discount):

Amortization/(Discount) = Coupon interest - Interest at Effective rate/IRR = Amortization/(Discount) for the period.

Amortized Cost: = Purchased Cost/Opening Amortized Cost– Amortization for the period – Principal Redemption (if any)

Complete Amortization Schedule for Pakistan Investment Bonds.

ABC Ltd                                              PIBs - 10 Years

For the year ended 31 December 2009   Issue Date          18-Apr-01

PIB HELD TO MATURITY                Maturity Date   18-Apr-11

                                                            Purchase cost   5,005,570

                                                            Face value        5,000,000

                                                            IRR (Half yearly)  6.976%

                                                            Coupon Rate        14%        

S#	Coupon Date	Interest / Redemption	Principal Redemption		Interest Income on IRR Basis	Discount/ Amortization	Closing Balance/ Amortized Cost
	Formula	F.V*Coup. Rate/2	As per Agreement		Purch. Cost * IRR	Int as per Coup. Rate - Int as per IRR	Opining. Amort. Cost  – Prncple Redemption -Amort.
1	18-Apr-08					-	5,005,570
2	18-Oct-08	350,000	-		349,221	779	5,004,791
3	18-Apr-09	350,000	-		349,167	833	5,003,957
4	18-Oct-09	350,000	-		349,108	892	5,003,066
5	18-Apr-10	350,000	-		349,046	954	5,002,112
6	18-Oct-10	350,000	-		348,980	1,020	5,001,092
7	18-Apr-11	350,000	5,000,000		348,908	1,092	-
						5,570
Amortization period			Days for the period		Total Days	Total Amortization for the year	Apportioned Premium
From 1 Jan to 18 April 09			108		182	495
From 18 April to 18 Oct 09			183		181	892
From 18 Oct to 31 Dec 09			74		182	388
						1,774
Amortized cost as at 18 Oct, 2009							5,003,066
	Amortization from 18 Oct to Dec 31,09						388
Amortized cost as at 31 Dec 2009							5,002,678

Ledger Entries:

At the time of purchase:

                                                            Debit               Credit

Investments                                          5,005,570

                 

Cash/Bank                                                       5,005,570

At the year ended 31 Dec, 2008:

Income Receivable/Cash/Bank  492,308

                       

                        Coupon interest                                    492,308          

Amortization Expense                           1,118

           

                        Investments                                          1,118

At the year ended 31 Dec, 2009:

Income Receivable/Cash/Bank  700,000

                       

                        Coupon interest                                    700,000          

Amortization Expense                           1,774

           

                        Investments                                          1,774

At the year ended 31 Dec, 2010:

Income Receivable/Cash/Bank  700,000

                       

                        Coupon interest                                    700,000          

Amortization Expense                           2,030

           

                        Investments                                          2,030

At the year ended 31 Dec, 2011:

Income Receivable/Cash/Bank  207,692

                       

                        Coupon interest                                    207,692          

Amortization Expense                           566

           

                        Investments                                          566

Click the Links Below to Download the Amortization Schedule in MS-Excel
 

Download file

Source: http://internalauditworkingpapers.weebly.com