6.3.3 Discount Accrual Processing
Let us consider a Loan contract with following parameters:
| 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 |
| Interest Payment Method | Bearing |
| IRR | 20.30% |
The projected cash flow for the contract would be
| 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:
Step 1
NPV of the contract is computed as of 15-Feb-2003 by discounting the future
cash flows as shown below:
Table 6-3 Cash Flows
| Due Date | Amount | (di-d1)/D | 1+IRR | (1+IRR)^((di-d 1)/D) | Discount CF |
|---|---|---|---|---|---|
| 01-Mar-2003 | 9205.48 | 0.038 | 1.203 | 1.0071 | 9140.46 |
| 01-Apr-2003 | 10191.78 | 0.123 | 1.203 | 1.023 | 9962.22 |
| 01-May-2003 | 9863.01 | 0.205 | 1.203 | 1.0387 | 9495.54 |
| 01-Jun-2003 | 10191.78 | 0.29 | 1.203 | 1.0551 | 9659.27 |
| 01-Jul-2003 | 9863.01 | 0.373 | 1.203 | 1.0713 | 9206.78 |
| 01-Aug-2003 | 10191.78 | 0.458 | 1.203 | 1.0882 | 9365.53 |
| 01-Sep-2003 | 10191.78 | 0.542 | 1.203 | 1.1054 | 9219.70 |
| 01-Oct-2003 | 9863.01 | 0.625 | 1.203 | 1.1224 | 8787.80 |
| 01-Nov-2003 | 10191.78 | 0.71 | 1.203 | 1.1401 | 8939.02 |
| 01-Dec-2003 | 9863.01 | 0.792 | 1.203 | 1.5755 | 8520.56 |
| 01-Jan-2004 | 1010191.78 | 0.877 | 1.203 | 1.1759 | 859105.75 |
| 951402.94 |
The NPV of the Contract as of 15-Feb-2003 = USD 951,402.94
Step 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
TDAn = 951402.94 – (1000000-60000)-4602.74+0
TDAn = 6800.2
Net Discount Accrual = TDAn – TDAn-1
Net Discount Accrual = 6800.20 – 6647.43
Net Discount Accrual = 152.77
Net Discount Accrual amount for 15-Feb-2003 processing = USD 152.77