Zero Bonds

Zero Bonds

Use

Zero bonds are non-interest bearing bonds which are issued at a very low price (discounted) and are usually redeemed at 100% at maturity.

There are two ways in which you can create zero bonds in the R/3 System:

1. Zero bonds with interest capitalization

You create these as a bond and mark them as a zero bond by setting the Discounted indicator when you create class master data in the condition header. You also have to assign a valuation class with the valuation category 10 (single position management) to the zero bonds in the position indicator.

2. Zero bonds without interest capitalization

You create these as normal bonds and manage the interest without a condition item. You do not set the Discounted indicator.

The following section explains the special features of zero bonds with interest capitalization. You manage zero bonds without interest capitalization in the same way as you manage other bonds.

Integration

Zero bonds with interest capitalization

When flows leave the position (sale, securities account transfer, repayment), the system generates an interest capitalization flow for the interest due up to the key date for the outflow amount as a planned record. The planned record is posted when you perform the period-end closing.

When you use the Amortized cost function, the system generates the interest capitalization flows for a particular key date and increases the book value of the position to the net present value calculated on the key date.

The system uses the acquisition value as the basis for calculating the interest capitalization. It also assumes a repayment price of 100%.

If the actual repayment is made below or above par, the system displays the difference between the actual repayment amount and the nominal amount as a price loss or gain.
If you sell a bond before it matures, the system calculates the net present value for the key date of the sale and displays the difference between the net present value calculated and the sale value as a price gain or price loss.

The system calculates all position value dates ‘inclusively’. Example: When you purchase a bond on 01/08 and sell it on 01/12, the interest capitalization amount is calculated for 5 days.

After you have run the Amortized cost report program, you can still perform key date valuation ( Performing position valuation), if required. This compares the new book value with the current market value on the key date and calculates any write-ups/write-downs (according to the rules defined in the valuation principle).

You cannot represent unit-quoted zero bonds in the system.

Prerequisites

We recommend that you create a product type specifically for zero bonds.

You must create a valuation class with valuation category 10 in Customizing for Basic Functions by choosing Define Valuation Classes.
If you have created a product type for zero bonds, you can define the valuation class as a default for this product type using the valuation parameters button in Customizing for Securities when you choose Maintain Accounting/Cash Mgmt Data.

A product type for zero bonds (04J Zero bonds) is included in the sample Customizing delivered with the system in addition to a valuation class for single position management (INDIVIDUAL).

To generate interest capitalization flows using the Amortized cost function when flows leave the position, you have to define the relevant flow types in Customizing by choosing Define Accrual/Deferral.

See also:

- The documentation for Define Accrual/Deferral in the Implementation Guide (IMG) for Securities.

- Amortized cost function

Activities

1. Create the zero bond as a bond (with the product type for zero bonds, if possible).

Make sure you set the Discounted indicator.

2. Create the Position indicator for the class and choose a valuation class with valuation category 10 in the valuation parameters.

See also:

Editing a class