SAC Procedure Including Interest

Initial Data

Date	Flow	Nominal Amount	Amount in Position Currency
06/01/00	1st Purchase	1,000,000	700,000
06/15/00	2nd Purchase	500,000	375,000
11/01/00	1st Sale	100,000	65,000
12/31/00	Interest		56,000
03/01/01	2nd Sale	1,400,000	1,260,000

Conditions

Interest is calculated and paid annually on December 31.
The final repayment is for December 31, 2001 (100% repayment price).
Interest calculation method 360/360 is used.

Amortization Key Date	Effective Interest Rate
06/15/00	32.502713
11/01/00	30.767301

Note Note

We have specified only the effective interest rates to demonstrate the matter clearly. To clarify the differences between the amortization methods, we will only analyze the key date valuations for December 29, 2000 and January 3, 2001.

End of the note.

Key Date Valuation for 12/29/00 (Including Amortization)

The nominal amount is 1,400,000. The calculation is based on the first sale.The amortized acquisition costs for 12/29/00 amount to 1,118,297. An artificial position inflow is generated for the key date of the last position change (11/01/00 in this case). This generates the cash flow relevant for amortization. Interest rate flows are also generated.

Position Date	Flow	Nominal Amount	Amount in Position Currency
11/01/00	Inflow	1,400,000	+ 1,118,296
12/31/00	Interest		56,000
12/31/01	Interest		56,000
12/31/01	Outflow	1,400,000	- 1,400,000

The effective interest rate of the cash flow is 30.7673016%.
Note: This calculation is based on an approximation method. To prove that the effective interest rate is correct, proceed as follows:
After interest factors have been determined for the individual flows, they are then discounted. If the net present value of the cash flow is zero, the effective interest rate used is correct.
The total of the net present values of the flows after 12/29/00 (two interest flows and repayment) determines an amortization value of 1,167,687. A write-up of 1,167,687 - 1,118,297 = 49,390 is generated as an amortization flow as part of the key date valuation.

Key Date Valuation for 01/03/01 (Including Amortization)

The nominal amount is 1,400,000. The calculation is based on the key date valuation for December 29, 2000.The amortized acquisition costs for 01/03/01 amount to 1,167,687. An artificial position inflow is generated for the last position change (key date valuation for 12/29/00 in this case). This generates the cash flow relevant for amortization. Interest rate flows are also generated.

Position Date	Flow	Nominal Amount	Amount in Position Currency
12/29/00	Inflow	1,400,000	+ 1,167,686
12/31/00	Interest		56,000
12/31/01	Interest		56,000
12/31/01	Outflow	1,400,000	- 1,400,000

The effective interest rate of the cash flow is 30.7673016%.
Note: This calculation is based on an approximation method. To prove that the effective interest rate is correct, proceed as follows:
After interest factors have been determined for the individual flows, they are then discounted. If the net present value of the cash flow is zero, the effective interest rate used is correct.
The total of the net present values of the flows after 01/03/00 (interest flows and repayment) determines an amortization value of 1,115,089. A write-down of 1,167,687 - 1,115,089 = 52,598is generated as an amortization flow as part of the key date valuation. Since the interest flow from 12/31/00 is paid (realized) before the amortization key date, it is no longer included in the position.
The book value (or the amortization) is reduced and leads to a write-down. The amortization curve is therefore no longer continuous; instead it jumps when the interest flows occur.

Note
These jumps can be avoided by offsetting the interest payment (or the accrual/deferral) to the same FI account. Alternatively, you can use the cash flow method with accrued interest adjustment. With this method, the amortization amount is adjusted (reduced or increased) using the accrued interest amount This prevents the jumps resulting from write-downs.

End of the note.