PAYABLE DATE
Payable date is the date on which a dividend is paid by the paying agent.
Saturday, February 24, 2007
RECORD DATE
RECORD DATE
Record date is the date set by a fund's Board of Director's which determines eligibility to receive a currently declared dividend. Those parties who are "on record" with the fund's transfer agent on this date will receive the dividend, regardless of whether they are entitled to it. Record date usually occurs four business days after ex-date.
Record date is the date set by a fund's Board of Director's which determines eligibility to receive a currently declared dividend. Those parties who are "on record" with the fund's transfer agent on this date will receive the dividend, regardless of whether they are entitled to it. Record date usually occurs four business days after ex-date.
EX-DATE
EX-DATE
Ex-date is the date which determines whether the owner of a fund is entitled to the current dividend. The holder of a fund is eligible to receive a dividend if the fund is owned prior to the beginning of trading on ex-date.
Also, on ex-date the price of the fund should drop by the approximate amount of the dividend. NOTE: If a fund is purchased on or after ex-date, the new owner is NOT eligible to receive the current dividend.
Ex-date is the date which determines whether the owner of a fund is entitled to the current dividend. The holder of a fund is eligible to receive a dividend if the fund is owned prior to the beginning of trading on ex-date.
Also, on ex-date the price of the fund should drop by the approximate amount of the dividend. NOTE: If a fund is purchased on or after ex-date, the new owner is NOT eligible to receive the current dividend.
DECLARATION DATE
DECLARATION DATE
Declaration date is the date on which a fund announces that a dividend will be paid to the fund's shareholders. All dividends must be authorized by the Board of Directors
Declaration date is the date on which a fund announces that a dividend will be paid to the fund's shareholders. All dividends must be authorized by the Board of Directors
INCOME DISTRIBUTIONS
INCOME DISTRIBUTIONS
Income that the mutual fund earns from interest or dividends generated by the fund's portfolio less the fund's expenses is distributed to the fund's shareholders. This is taxed by U.S. Government as ordinary income
Income that the mutual fund earns from interest or dividends generated by the fund's portfolio less the fund's expenses is distributed to the fund's shareholders. This is taxed by U.S. Government as ordinary income
CAPITAL GAINS DISTRIBUTIONS
CAPITAL GAINS DISTRIBUTIONS
Capital Gains are the profits made by a mutual fund's portfolio. They are created when a security is sold for a higher price than was paid for its purchase. Mutual funds, as registered investment companies, do not have to pay taxes on these gains. All capital gains are annually distributed to the fund's individual share holders who then become liable for the tax consequences of the mutual fund's activity. These distributions are normally made towards the end of the year. This money is taxed by the U.S. Government as a capital gain.Capital losses are not distributed annually. They are carried forward and used to offset future capital gains.
Capital Gains are the profits made by a mutual fund's portfolio. They are created when a security is sold for a higher price than was paid for its purchase. Mutual funds, as registered investment companies, do not have to pay taxes on these gains. All capital gains are annually distributed to the fund's individual share holders who then become liable for the tax consequences of the mutual fund's activity. These distributions are normally made towards the end of the year. This money is taxed by the U.S. Government as a capital gain.Capital losses are not distributed annually. They are carried forward and used to offset future capital gains.
Expense Types
Expense Types
- Fixed Expenses remain constant and only change when the client sends written authorization confirming a new factor.
- Variable Expenses usually fluctuate with the total net assets of the funds. The client provides a ratio that the Fund Groups use as a basis point to calculated the daily accrual amounts.
For more detail, please see your area's specific Standard Operating Procedure.
Short Term Vs. Long Term
Short Term Vs. Long Term
The terms "short-term" and "long-term" are used in two contexts. They can be used to refer to the life of a security, or they can refer to the gain or loss incurred when a security in a fund's portfolio is sold.
SECURITIES
Short-term Securities
A short-term security is an investment vehicle with a maturity, put, or call period of less than one year. These instruments are considered safe and liquid and are the only securities that a Money Market fund may purchase. They are often purchased by other mutual funds as a means of investing cash for a short period of time. Short-term securities include commercial paper, banker's acceptances, negotiable certificates of deposit, U.S. treasury bills, federal agency discount A short-term security is an investment vehicle with a maturity, put, or call period of less than one year. These instruments are considered safe and liquid and are the only securities that a Money Market fund may purchase. They are often purchased by other mutual funds as a means of investing cash for a short period of time. Short-term securities include commercial paper, banker's acceptances, negotiable certificates of deposit, U.S. treasury bills, federal agency discount
Long-term Securities
A long-term security is an investment vehicle with either no maturity or a maturity of one year or more from issue date. Long-term securities include common and preferred stock, corporate notes and bonds, U.S. Treasury notes and bonds, municipal bonds, and GNMAs.
GAINS AND LOSSES
Gains and losses resulting from the sale of securities are categorized for tax reporting purposes by the length of time in which the security has been held in the portfolio.
SHORT-TERM applies to gains and losses on securities held NOT MORE THAN one year from their date of purchase.
LONG-TERM applies to gains and losses on securities held MORE than one year from their date of purchase.
NOTE: The holding period for each type of gain or loss is determined by current tax legislation. The holding periods given above are based on the Tax Reform Act of 1986. They are subject to change if new tax laws are passed.
In addition, GAINS are categorized as Short-Term 3 (Short-Short) if they result from the sale of an investment vehicle held less than three months. The Internal Revenue Code states that a fund may not derive more than 30% of its gross income from gains that fall into this category. If a fund DOES derive more than 30%of its gross income from short-term 3 gains, it will lose its status as a Regulated Investment Company.
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The terms "short-term" and "long-term" are used in two contexts. They can be used to refer to the life of a security, or they can refer to the gain or loss incurred when a security in a fund's portfolio is sold.
SECURITIES
Short-term Securities
A short-term security is an investment vehicle with a maturity, put, or call period of less than one year. These instruments are considered safe and liquid and are the only securities that a Money Market fund may purchase. They are often purchased by other mutual funds as a means of investing cash for a short period of time. Short-term securities include commercial paper, banker's acceptances, negotiable certificates of deposit, U.S. treasury bills, federal agency discount A short-term security is an investment vehicle with a maturity, put, or call period of less than one year. These instruments are considered safe and liquid and are the only securities that a Money Market fund may purchase. They are often purchased by other mutual funds as a means of investing cash for a short period of time. Short-term securities include commercial paper, banker's acceptances, negotiable certificates of deposit, U.S. treasury bills, federal agency discount
Long-term Securities
A long-term security is an investment vehicle with either no maturity or a maturity of one year or more from issue date. Long-term securities include common and preferred stock, corporate notes and bonds, U.S. Treasury notes and bonds, municipal bonds, and GNMAs.
GAINS AND LOSSES
Gains and losses resulting from the sale of securities are categorized for tax reporting purposes by the length of time in which the security has been held in the portfolio.
SHORT-TERM applies to gains and losses on securities held NOT MORE THAN one year from their date of purchase.
LONG-TERM applies to gains and losses on securities held MORE than one year from their date of purchase.
NOTE: The holding period for each type of gain or loss is determined by current tax legislation. The holding periods given above are based on the Tax Reform Act of 1986. They are subject to change if new tax laws are passed.
In addition, GAINS are categorized as Short-Term 3 (Short-Short) if they result from the sale of an investment vehicle held less than three months. The Internal Revenue Code states that a fund may not derive more than 30% of its gross income from gains that fall into this category. If a fund DOES derive more than 30%of its gross income from short-term 3 gains, it will lose its status as a Regulated Investment Company.
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How Is Income Earned
How Is Income Earned
Dividends
Dividends represent the profits of a corporation that are distributed to that corporation's shareholders. A dividend is earned when a security is held on the day before "ex-date." The amount of the dividend that will be received is in proportion to the number of shares of the security that are held. A fund that purchases an equity security on or after ex-date is not entitled to the current dividend. Likewise, a fund selling an equity security on or after ex-date is entitled to the current dividend.
Interest Income
Interest income is accrued and posted daily. A mutual fund is entitled to interest income on a debt security at the rate stated in the bond's indenture for each day the security is held. Interest payments are received from the issuer at periodic intervals determined when the security is issued. Payments are usually received monthly, quarterly, or semiannually.
Accretion
Debt securities may be purchased at less than par value, or at a discount. The difference between the purchase amount and the par value is allocated and accounted for as income, or accreted, over the life of the security. Discount is NOT accreted on tax-exempt securities. Accretion of discount is often incorrectly called amortization of discount.
Amortization
Debt securities may be purchased at more than par value, or at premium. When the difference between the purchase amount and the par value is written off over the life of the security, it is said to be "amortized." Premium must be amortized on tax-exempt securities, but the holder of a taxable security has the option of amortizing premium.
Original Issue Discount
Original Issue Discount (OID) arises when a debt security is issued at a price less than the stated par value, and meets certain requirements set by the Internal Revenue Service. The difference between the issue amount and the par amount is accreted over the life of the security.
Realized Gains & Losses
The sale of a security may generate a realized gain or a realized loss. If a security is sold for MORE than the cost at which it is held, a realized capital gain results. If the security is sold for LESS than the cost at which it is held, a realized capital loss is incurred.
Dividends
Dividends represent the profits of a corporation that are distributed to that corporation's shareholders. A dividend is earned when a security is held on the day before "ex-date." The amount of the dividend that will be received is in proportion to the number of shares of the security that are held. A fund that purchases an equity security on or after ex-date is not entitled to the current dividend. Likewise, a fund selling an equity security on or after ex-date is entitled to the current dividend.
Interest Income
Interest income is accrued and posted daily. A mutual fund is entitled to interest income on a debt security at the rate stated in the bond's indenture for each day the security is held. Interest payments are received from the issuer at periodic intervals determined when the security is issued. Payments are usually received monthly, quarterly, or semiannually.
Accretion
Debt securities may be purchased at less than par value, or at a discount. The difference between the purchase amount and the par value is allocated and accounted for as income, or accreted, over the life of the security. Discount is NOT accreted on tax-exempt securities. Accretion of discount is often incorrectly called amortization of discount.
Amortization
Debt securities may be purchased at more than par value, or at premium. When the difference between the purchase amount and the par value is written off over the life of the security, it is said to be "amortized." Premium must be amortized on tax-exempt securities, but the holder of a taxable security has the option of amortizing premium.
Original Issue Discount
Original Issue Discount (OID) arises when a debt security is issued at a price less than the stated par value, and meets certain requirements set by the Internal Revenue Service. The difference between the issue amount and the par amount is accreted over the life of the security.
Realized Gains & Losses
The sale of a security may generate a realized gain or a realized loss. If a security is sold for MORE than the cost at which it is held, a realized capital gain results. If the security is sold for LESS than the cost at which it is held, a realized capital loss is incurred.
Capital Stock Income Equalization
Income Equalization
DEFINITION
Income equalization is an accounting practice used by some management companies to prevent non-daily income distributions from fluctuating with changes in Capital Stock (Cap Stock) activity. Income equalization is most often used on funds where the objective is to provide investors with a return based on the fund's earned income. Income equalization is used to prevent unfair distribution of a fund’s earnings, or dilution of existing shareholder’s earnings caused by Cap Stock activity occurring between payment periods.
EFFECT OF INCOME EQUALIZATION
As a fund earns income, the amount of undistributed income rises. When it is time for a distribution to be paid out, the undistributed income is disbursed to shareholders of record.
Funds Not Using Income Equalization
If a mutual fund does not use income equalization the income distribution is the same for all shareholders of record, regardless of when the shares were purchased. In this respect, there is no benefit for shareholders whose money is consistent in the fund. Shareholders whose money is held in the fund from the beginning of the payment period could see earned income per share diluted as investors buy into the fund during the payment period. Although undistributed income is a part of a fund's assets which make up the Net Asset Value (NAV) per share, shareholders who redeem out of a fund before the end of a payment period do not receive a set portion of the undistributed income.
Funds Using Income Equalization
If a mutual fund does use income equalization, the distribution for the pay period is a stated factor in the price per share. Income equalization, therefore, applies to that portion of a purchase or redemption payment, which is allocated for undistributed earnings. As a result of this allocation, the undistributed net income per share remains constant. Investors buying into the fund just prior to ex-date will not dilute the income earned by shareholders whose money has been held in the fund for a longer period of time. Shareholders who wish to redeem out of a fund before the end of a payment period are guaranteed to receive the full income distribution for the payment period earned up to the point of redemption.
DEFINITION
Income equalization is an accounting practice used by some management companies to prevent non-daily income distributions from fluctuating with changes in Capital Stock (Cap Stock) activity. Income equalization is most often used on funds where the objective is to provide investors with a return based on the fund's earned income. Income equalization is used to prevent unfair distribution of a fund’s earnings, or dilution of existing shareholder’s earnings caused by Cap Stock activity occurring between payment periods.
EFFECT OF INCOME EQUALIZATION
As a fund earns income, the amount of undistributed income rises. When it is time for a distribution to be paid out, the undistributed income is disbursed to shareholders of record.
Funds Not Using Income Equalization
If a mutual fund does not use income equalization the income distribution is the same for all shareholders of record, regardless of when the shares were purchased. In this respect, there is no benefit for shareholders whose money is consistent in the fund. Shareholders whose money is held in the fund from the beginning of the payment period could see earned income per share diluted as investors buy into the fund during the payment period. Although undistributed income is a part of a fund's assets which make up the Net Asset Value (NAV) per share, shareholders who redeem out of a fund before the end of a payment period do not receive a set portion of the undistributed income.
Funds Using Income Equalization
If a mutual fund does use income equalization, the distribution for the pay period is a stated factor in the price per share. Income equalization, therefore, applies to that portion of a purchase or redemption payment, which is allocated for undistributed earnings. As a result of this allocation, the undistributed net income per share remains constant. Investors buying into the fund just prior to ex-date will not dilute the income earned by shareholders whose money has been held in the fund for a longer period of time. Shareholders who wish to redeem out of a fund before the end of a payment period are guaranteed to receive the full income distribution for the payment period earned up to the point of redemption.
Cap Stock Accounts
Cap Stock Accounts
DEFINITION
Capital Stock (Cap Stock), loosely defined, refers to the share base of a fund. Closed-end mutual funds, by definition, have a constant share base. For open-end mutual funds, changes to the share base can occur on a daily basis due to subscriptions and redemptions. Cap Stock activity is reported by the transfer agent to the Portfolio Administrator each morning.
CAPITAL SHARES
Capital shares are fund shares, which have been authorized and issued. This includes outstanding and treasury shares. For an open-end mutual fund there is generally no limit on the number of capital shares which can be authorized and issued. For a closed-end mutual fund the number of authorized shares is fixed. This is determined when the fund is chartered and is stated in the fund's prospectus.
OUTSTANDING SHARES
Outstanding shares are those which are currently being held by shareholders. The number of outstanding shares is the share base used for price and yield calculations.
TREASURY SHARES
Treasury shares are fund shares, which have been issued by the fund and later bought back. In the case of open-end funds, treasury shares occur as a result of shareholder redemptions. In the case of closed-end funds, treasury shares are those, which the fund has bought back from an underwriter or on the open market. Treasury shares are inactive. They are not used for price or yield calculations and do not receive distributions or dividends. Treasury shares are identified on the trial balance for record keeping purposes.
PAR VALUE
Par value (par) is a nominal value assigned to a fund share. It is designated when the fund is chartered and remains constant. It should not be confused with the actual value or market value of a fund share. Par plus paid-in surplus equal the fund's offering price per share. Management companies can charter funds with no-par value.
PAID-IN SURPLUS
Paid-in surplus is the amount over the par that makes up a fund's price per share. Like par, paid-in surplus should not be confused with the actual value or market value of a fund share.
DEFINITION
Capital Stock (Cap Stock), loosely defined, refers to the share base of a fund. Closed-end mutual funds, by definition, have a constant share base. For open-end mutual funds, changes to the share base can occur on a daily basis due to subscriptions and redemptions. Cap Stock activity is reported by the transfer agent to the Portfolio Administrator each morning.
CAPITAL SHARES
Capital shares are fund shares, which have been authorized and issued. This includes outstanding and treasury shares. For an open-end mutual fund there is generally no limit on the number of capital shares which can be authorized and issued. For a closed-end mutual fund the number of authorized shares is fixed. This is determined when the fund is chartered and is stated in the fund's prospectus.
OUTSTANDING SHARES
Outstanding shares are those which are currently being held by shareholders. The number of outstanding shares is the share base used for price and yield calculations.
TREASURY SHARES
Treasury shares are fund shares, which have been issued by the fund and later bought back. In the case of open-end funds, treasury shares occur as a result of shareholder redemptions. In the case of closed-end funds, treasury shares are those, which the fund has bought back from an underwriter or on the open market. Treasury shares are inactive. They are not used for price or yield calculations and do not receive distributions or dividends. Treasury shares are identified on the trial balance for record keeping purposes.
PAR VALUE
Par value (par) is a nominal value assigned to a fund share. It is designated when the fund is chartered and remains constant. It should not be confused with the actual value or market value of a fund share. Par plus paid-in surplus equal the fund's offering price per share. Management companies can charter funds with no-par value.
PAID-IN SURPLUS
Paid-in surplus is the amount over the par that makes up a fund's price per share. Like par, paid-in surplus should not be confused with the actual value or market value of a fund share.
Written Options
Written Options
Premiums from writing put and call options should initially be recorded as a liability, not as income or gain. This is due to the uncertainty surrounding the ultimate gain or loss at the final disposition of the option. Subsequently the premium liability is adjusted for changes in the current market value of the option written and finally recognized as part of a gain or loss when the option contract is closed.
Three ways of closing a written option:
Option expires at maturity; the entire premium received represents a gain to the writer, and a loss to the holder
Closing purchase / buy to cover before maturity; a realized gain / loss similar to a security sale is recognized. A loss is reported if the cost of the closing transaction exceeds the premium received for the original position. A gain is reported if the cost of the closing transaction is less than the premium received for the original position.
Assigned / exercise at or before maturity; Proceeds of written option added to sale proceeds / deducted from purchase price. A covered call writer will receive the exercise price plus the premium received. The gain / loss will be based upon this amount. For the uncovered call writer, any realized loss will be reduced by the premium received. The writer of a put option will record as its cost basis the exercise price plus commissions reduced by the premiums received. The proceeds of securities sold by exercising put options should be reduced by premiums received.
Funds account for domestic options on MCH and foreign options are booked on MCH and priced manually utilizing off-line spreadsheets (unless the Derivatives Workstation is utilized).
Examples of option entries are illustrated below.
Option Written; 10 IBM 140 Calls @ $1.25
DR Receivable for Option
1250
CR Option Premium Liability
1250
The first day appreciation/depreciation is calculated by taking the difference between the current market value of the option and the original premium received. On subsequent days the change is calculated by taking the current market value premium and the previous market value premium. If the current market value premium is less than the previous premium:
DR Market Value of App/ Dep Options
250
CR Unrealized Gain / Loss Options
250
Closing purchase / buying back an option; 10 IBM Calls @ .75 = $750
DR Option Premium Liability
1250
CR Payable for Options Purchased
750
CR Realized Gain / Loss Options
500
Assigning / exercise of an option; When a call option is assigned, the option premium liability is closed out to realized gain / loss. For a put option, the option premium liability is closed out to cost of investments.
Expiring an option; 10 IBM 140 Calls @ 1.25 (Original premium price)
DR Option Premium Liability
1250
CR Realized Gain / Loss Options
1250
Generally the fund will designate the underlying security upon which an option is written. Segregated shares will appear on the SMAC report through the BPOS function. These securities should continue to be reported at value determined in a manner appropriate to the underlying securities
Premiums from writing put and call options should initially be recorded as a liability, not as income or gain. This is due to the uncertainty surrounding the ultimate gain or loss at the final disposition of the option. Subsequently the premium liability is adjusted for changes in the current market value of the option written and finally recognized as part of a gain or loss when the option contract is closed.
Three ways of closing a written option:
Option expires at maturity; the entire premium received represents a gain to the writer, and a loss to the holder
Closing purchase / buy to cover before maturity; a realized gain / loss similar to a security sale is recognized. A loss is reported if the cost of the closing transaction exceeds the premium received for the original position. A gain is reported if the cost of the closing transaction is less than the premium received for the original position.
Assigned / exercise at or before maturity; Proceeds of written option added to sale proceeds / deducted from purchase price. A covered call writer will receive the exercise price plus the premium received. The gain / loss will be based upon this amount. For the uncovered call writer, any realized loss will be reduced by the premium received. The writer of a put option will record as its cost basis the exercise price plus commissions reduced by the premiums received. The proceeds of securities sold by exercising put options should be reduced by premiums received.
Funds account for domestic options on MCH and foreign options are booked on MCH and priced manually utilizing off-line spreadsheets (unless the Derivatives Workstation is utilized).
Examples of option entries are illustrated below.
Option Written; 10 IBM 140 Calls @ $1.25
DR Receivable for Option
1250
CR Option Premium Liability
1250
The first day appreciation/depreciation is calculated by taking the difference between the current market value of the option and the original premium received. On subsequent days the change is calculated by taking the current market value premium and the previous market value premium. If the current market value premium is less than the previous premium:
DR Market Value of App/ Dep Options
250
CR Unrealized Gain / Loss Options
250
Closing purchase / buying back an option; 10 IBM Calls @ .75 = $750
DR Option Premium Liability
1250
CR Payable for Options Purchased
750
CR Realized Gain / Loss Options
500
Assigning / exercise of an option; When a call option is assigned, the option premium liability is closed out to realized gain / loss. For a put option, the option premium liability is closed out to cost of investments.
Expiring an option; 10 IBM 140 Calls @ 1.25 (Original premium price)
DR Option Premium Liability
1250
CR Realized Gain / Loss Options
1250
Generally the fund will designate the underlying security upon which an option is written. Segregated shares will appear on the SMAC report through the BPOS function. These securities should continue to be reported at value determined in a manner appropriate to the underlying securities
Futures
Futures
In order to initiate a futures contract, an initial margin deposit of collateral is made and is entered on to the general ledger. On a daily basis the mark to market for variation margin account is adjusted for changes between the market value of the contracts on the current day and the previous day. The offset to the entry for variation margin is an unrealized gain or loss recorded on the funds’ records.
Variation margin is settled each day based upon the mark to market calculated for the prior close of business. When the contract is closed out, a final variation margin payment based upon the TD-1 value, net of fees is recorded and a corresponding amount is recorded as a gain or loss.
Short Sale: When a short contract is sold and a short position is established, collateral is segregated on SMAC. An off-line futures spreadsheet is then set up (unless the Derivative Workstation is utilized). No entry is required to reflect the segregation of collateral on MCH. Accounting entries are as follows:
As an example, if the cost to repurchase exceeds the proceeds, this will result in depreciation in the contract.
DR / CR Unrealized App/Dep on Futures
DR / CR Cash
To reflect unrealized appreciation / depreciation of futures margin variation for the difference between the contract price and the closing price on the trade date.
Subsequently the contract will be re-priced daily by comparing the current contract value to the original proceeds of the contracts, and calculating an unrealized appreciation/ depreciation. An entry will be posted to reflect the change in the unrealized appreciation / depreciation from the prior day.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Unrealized App/Dep on Futures
To reflect daily valuation of future contracts
Changes in the unrealized appreciation / depreciation are paid to or received from the broker.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Cash
To reflect payment to broker for change in daily valuation
When the open contracts are repurchased, the realized gain / loss is calculated using the TD-1 value of the contract. In addition, an entry is made to adjust the variation margin to an amount based upon the TD-1 value. The realized gain / loss is typically split 60% long term and 40% short term as shown below.
DR / CR Unrealized App/Dep on Futures
DR / CR Realized Gain/ Loss on futures LT
DR / CR Realized Gain/ Loss on futures ST
To reflect unrealized gain / loss on futures market value
Long Contracts: The record keeping and accounting for long contracts is very similar to that of other long term securities in a portfolio. When a contract is purchased, a cost is established; if the price goes up there is appreciation , if it goes down there is depreciation. Collateral is segregated on SMAC. An off-line futures spreadsheet is set up (unless the Derivative Workstation is utilized). No entry is required to reflect the segregation of collateral on MCH. Accounting entries are as follows:
As an example, if the value of the contract exceeds the cost, this will result in appreciation in the contract.
DR / CR Unrealized App/Dep on Futures
DR / CR Cash
To reflect unrealized appreciation / depreciation of futures margin variation for the difference between the contract price and the closing price on the trade date.
Subsequently the contract will be re-priced daily by comparing the current contract value to the original cost of the contracts, and calculating an unrealized appreciation/ depreciation. An entry will be posted to reflect the change in the unrealized appreciation / depreciation from the prior day.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Unrealized App/Dep on Futures
To reflect daily valuation of future contracts
Changes in the unrealized appreciation / depreciation are paid to or received from the broker.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Cash
To reflect payment to broker for change in daily valuation
When the open contracts are sold, the realized gain / loss is calculated using the TD-1 value of the contract. In addition, an entry is made to adjust the variation margin to an amount based upon the TD-1 value. The realized gain / loss is typically split 60% long term and 40% short term as shown below.
DR / CR Unrealized App/Dep on Futures
DR / CR Realized Gain/ Loss on futures LT
DR / CR Realized Gain/ Loss on futures ST
To reflect unrealized gain / loss on futures market value
In order to initiate a futures contract, an initial margin deposit of collateral is made and is entered on to the general ledger. On a daily basis the mark to market for variation margin account is adjusted for changes between the market value of the contracts on the current day and the previous day. The offset to the entry for variation margin is an unrealized gain or loss recorded on the funds’ records.
Variation margin is settled each day based upon the mark to market calculated for the prior close of business. When the contract is closed out, a final variation margin payment based upon the TD-1 value, net of fees is recorded and a corresponding amount is recorded as a gain or loss.
Short Sale: When a short contract is sold and a short position is established, collateral is segregated on SMAC. An off-line futures spreadsheet is then set up (unless the Derivative Workstation is utilized). No entry is required to reflect the segregation of collateral on MCH. Accounting entries are as follows:
As an example, if the cost to repurchase exceeds the proceeds, this will result in depreciation in the contract.
DR / CR Unrealized App/Dep on Futures
DR / CR Cash
To reflect unrealized appreciation / depreciation of futures margin variation for the difference between the contract price and the closing price on the trade date.
Subsequently the contract will be re-priced daily by comparing the current contract value to the original proceeds of the contracts, and calculating an unrealized appreciation/ depreciation. An entry will be posted to reflect the change in the unrealized appreciation / depreciation from the prior day.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Unrealized App/Dep on Futures
To reflect daily valuation of future contracts
Changes in the unrealized appreciation / depreciation are paid to or received from the broker.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Cash
To reflect payment to broker for change in daily valuation
When the open contracts are repurchased, the realized gain / loss is calculated using the TD-1 value of the contract. In addition, an entry is made to adjust the variation margin to an amount based upon the TD-1 value. The realized gain / loss is typically split 60% long term and 40% short term as shown below.
DR / CR Unrealized App/Dep on Futures
DR / CR Realized Gain/ Loss on futures LT
DR / CR Realized Gain/ Loss on futures ST
To reflect unrealized gain / loss on futures market value
Long Contracts: The record keeping and accounting for long contracts is very similar to that of other long term securities in a portfolio. When a contract is purchased, a cost is established; if the price goes up there is appreciation , if it goes down there is depreciation. Collateral is segregated on SMAC. An off-line futures spreadsheet is set up (unless the Derivative Workstation is utilized). No entry is required to reflect the segregation of collateral on MCH. Accounting entries are as follows:
As an example, if the value of the contract exceeds the cost, this will result in appreciation in the contract.
DR / CR Unrealized App/Dep on Futures
DR / CR Cash
To reflect unrealized appreciation / depreciation of futures margin variation for the difference between the contract price and the closing price on the trade date.
Subsequently the contract will be re-priced daily by comparing the current contract value to the original cost of the contracts, and calculating an unrealized appreciation/ depreciation. An entry will be posted to reflect the change in the unrealized appreciation / depreciation from the prior day.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Unrealized App/Dep on Futures
To reflect daily valuation of future contracts
Changes in the unrealized appreciation / depreciation are paid to or received from the broker.
DR / CR Receivable/ Payable for Margin Variation
DR / CR Cash
To reflect payment to broker for change in daily valuation
When the open contracts are sold, the realized gain / loss is calculated using the TD-1 value of the contract. In addition, an entry is made to adjust the variation margin to an amount based upon the TD-1 value. The realized gain / loss is typically split 60% long term and 40% short term as shown below.
DR / CR Unrealized App/Dep on Futures
DR / CR Realized Gain/ Loss on futures LT
DR / CR Realized Gain/ Loss on futures ST
To reflect unrealized gain / loss on futures market value
Realized Gain/Loss
Realized Gain/Loss
Funds that recognize Currency Gain/Loss (TD-SD Gain/Loss)
Type
Calculation
Currency Gain/Loss on security settlement, FX and income received:
1. For currency coming into the fund:
2. For currency going out of the fund:
This gain/loss measures the change in value due to exchange rate fluctuation between the Trade Date of a transaction and the Settlement Date of a transaction.
1. Local amount/SD exchange rate) - (Local amount/TD exchange rate)
2. (Local amount/TD exchange rate) - (Local amount/SD exchange rate)
Disposal of Currency Gain/Loss:
This gain/loss measures the change in value of the currency due to the exchange rate fluctuation between the settlement date exchange rate of the transaction which created the original cost of the currency coming into the fund and the settlement date exchange rate of the transaction which cause the currency to leave the fund.
(Local amount/SD exchange rate) - (Local amount/Original exchange rate)
Security Gain/Loss
This measures the local price a security was purchased at and the local price at which the security was sold.
Local sell proceeds - Local cost for original buy
Currency Gain/Loss on sell of security:
This measures the exchange rate fluctuation of the value of the original buy amount of a security compared to the value of the original buy amount on the date of the sell.
(Original local cost of the security/TD sell exchange rate) - (Original local cost of the security/original TD buy exchange rate)
Funds that do not recognize Currency Gain/Loss (TD-SD Gain/Loss)
Type
Calculation
Currency Gain/Loss on security settlement, FX and income received:
This is not used
Disposal of Currency Gain/Loss:
This gain/loss measures the change in value of the currency due to the exchange rate fluctuation between the exchange rate of the trade date of the transaction which created the original cost of the currency coming into the fund and the exchange rate on the trade date of the transaction which cause the currency to leave the fund.
(Local amount/TD exchange rate) - (Local amount/Original exchange rate)
Security Gain/Loss
This measures the local price change of a security between the price at which it was purchased and the price at which it was sold.
Local sell proceeds - Local cost for original buy
Currency Gain/Loss on sell of security:
This measures the exchange rate fluctuation of the value of the original buy amount of a security compared to the value of the original buy amount on the date of the sell.
(Original local cost of the security/TD sell exchange rate) - (Original local cost of the security/original TD buy exchange rate)
Funds that recognize Currency Gain/Loss (TD-SD Gain/Loss)
Type
Calculation
Currency Gain/Loss on security settlement, FX and income received:
1. For currency coming into the fund:
2. For currency going out of the fund:
This gain/loss measures the change in value due to exchange rate fluctuation between the Trade Date of a transaction and the Settlement Date of a transaction.
1. Local amount/SD exchange rate) - (Local amount/TD exchange rate)
2. (Local amount/TD exchange rate) - (Local amount/SD exchange rate)
Disposal of Currency Gain/Loss:
This gain/loss measures the change in value of the currency due to the exchange rate fluctuation between the settlement date exchange rate of the transaction which created the original cost of the currency coming into the fund and the settlement date exchange rate of the transaction which cause the currency to leave the fund.
(Local amount/SD exchange rate) - (Local amount/Original exchange rate)
Security Gain/Loss
This measures the local price a security was purchased at and the local price at which the security was sold.
Local sell proceeds - Local cost for original buy
Currency Gain/Loss on sell of security:
This measures the exchange rate fluctuation of the value of the original buy amount of a security compared to the value of the original buy amount on the date of the sell.
(Original local cost of the security/TD sell exchange rate) - (Original local cost of the security/original TD buy exchange rate)
Funds that do not recognize Currency Gain/Loss (TD-SD Gain/Loss)
Type
Calculation
Currency Gain/Loss on security settlement, FX and income received:
This is not used
Disposal of Currency Gain/Loss:
This gain/loss measures the change in value of the currency due to the exchange rate fluctuation between the exchange rate of the trade date of the transaction which created the original cost of the currency coming into the fund and the exchange rate on the trade date of the transaction which cause the currency to leave the fund.
(Local amount/TD exchange rate) - (Local amount/Original exchange rate)
Security Gain/Loss
This measures the local price change of a security between the price at which it was purchased and the price at which it was sold.
Local sell proceeds - Local cost for original buy
Currency Gain/Loss on sell of security:
This measures the exchange rate fluctuation of the value of the original buy amount of a security compared to the value of the original buy amount on the date of the sell.
(Original local cost of the security/TD sell exchange rate) - (Original local cost of the security/original TD buy exchange rate)
Interest Income
Securities Which Pay Interest
Debt securities pay interest A debt security is an instrument issued by a corporation, the US Government, a government agency, or a municipality to raise capital The purchaser of a debt security has, in effect, made a loan to the issuer The amount of the loan is the principal amount of the security, and interest represents the cost to the issuer for use of the principal Debt issues are often accompanied by a supplementary indenture which defines the various terms of the loan,including the following:
*par value
* maturity date
* interest rate
* rate or index to which variable rate is tied
* interest payment dates
* any redemption rights or call privileges
* any principal paydown or sinking fund features
If the issuer of a security fails to either make a scheduled interest or principal payment or to meet some other provision of the security's indenture, that security is considered to be in default Default may lead to the issuer declaring bankruptcy Debt securities include corporate bonds and notes, USTreasury bonds and notes, municipal bonds, debentures, mortgage-backed securities, variable rate demand notes,commercial paper, US Treasury bills, domestic and Eurodollar certificates of deposit, banker's acceptances, and repurchase agreements
Accrual Basis
The accrual basis is a method used to account for interest earned on debt securities Interest is accounted for over the time period in which it is earned, regardless of when cash payment is received The number of days in a security's payment period must be determined in order to properly reflect the accrued interest Provisions for the accrual basis are stated in a security's indenture Most long-term (maturing in more than one year) debt securities accrue interest income for 30 days per monthover 360 days per year This is commonly known as "30/360" Others accrue interest for each day of the month over each day of the year This is known as "actual/actual" Most short-term (maturing in one year or less) securities accrue interest for each day of their life over a 360-day year This is known as "actual/360"
Accrual Basis Schedule
SECURITY
DAYS/MONTH
DAYS/YEAR
corporate bonds & notes
30
360
GNMAs/FNMAs/FHLMCs
30
360
banker's acceptances
actual
360
certificates of deposit
actual
360
commercial paper
actual
360
US treasury notes & bonds
actual
360
municipal bonds
actual or 30
actual or 360
VRDNs
actual or 30
actual or 360
Periodic Payments
Interest is paid by the issuer of a debt security as compensation for the issuer's use of money Interest payments are received at regular intervals that are determined when the security is first issued Interest payments on long-term securities are usually received periodically, on a monthly, quarterly, or semi-annual schedule Interest on short-term (money market) securities is usually received when the security matures However, interest on variable rate securities may be received monthly, quarterly, or semi-annually Once a corporation, municipality, or government agency has issued debt, it is legally obligated to make interest payments on each designated payment date, regardless of whether the issuer earns income or incursa loss
Payment Schedule
The chart below lists the frequency of interest payments for various types of securities SECURITY PAYS GNMAs/FNMAs/FHLMCs monthlyVRDNs monthly, quarterly or semiannually corporate bonds & notes semiannually municipal bonds semiannually US treasury notes & bonds semiannually banker's acceptances at maturity certificates of deposit at maturitycommercial paper at maturity US treasury bills at maturity
Fixed Vs Variable Rates
Securities issued at a fixed rate of interest accrue income at a constant interest rate for the life of thesecurity The interest rate is determined when the security is issued and does not change
Variable Rates
Variable rate securities are not issued at a specific interest rate Instead, the interest rate changes according to parameters specified when the security isissued The rates may change daily, weekly, or monthly, or when a specific index/rate to which the interest rate is tied (eg, the prime lending rate) changes The frequency of rate changes is determined when the security is issued Although rates change, payment dates do not Payments must be disbursed as specified in the indenture Variable rate securities are usually either municipal bonds or money market instruments, so both long-term and short-term securities may have variable rates These securities may also be known as floating rate items or variable rate demand notes (VRDNs)
Interest Bought And Sold
When a debt security is purchased or sold after issue date and between interest payment dates, interest is purchased from the previous owner, or is sold to the buyer, respectively This interest amount represents the interest that the previous owner has earned since the last payment date The previous owner receives this amount from the buyer upon settlement because, on the next payment date, the buyer will be the holder of record and will receive an interest payment for the entire pay period Interest bought is reflected in the following accounting entry:
DR Interest Receivable CR Payable for Investments Purchased
Interest sold is reflected in the following accounting entry:
DR Receivable for Investments Sold CR Interest Receivable
Interest Receivable
Interest Receivable represents interest that has been accrued and accounted for but not yet received in cash The Interest Receivable account on the Trial Balance is an asset account Its balance is affected by interest bought or sold, interest income accruals, and interest payments received Interest income is accrued and accounted for daily A fund is entitled to interest income on a debt security for each day that it holds that security Accounting for interest income is reflected in the following accounting entry:
DR Interest Receivable CR Interest Income
Interest payments represent income earned on an interest bearing debt security Interest is paid by the issuer of a security to the holder of record at periodic intervals that are determined when the security is issued The receipt of interest payments is reflected in the following accounting entry:
DR Cash CR Interest Receivable
Interest At Maturity
A debt security's maturity date is the date on which principal and all outstanding interest becomes due and payable Maturity date is determined when the security is originally issued Most long-term interest bearing securities and some short-term securities, such as variable rate demand notes (VRDNs), have regularly scheduled interest payment dates Only the final interest payment will be received with the principal payment when these items mature, since the holder of the security has received interest payments throughout the life of the security In contrast, all of the interest that has been accrued on most short-term securities is received when the security matures In either case, the following accounting entry records a security's maturity:
DR Cash CR Cost CR Interest Receivable
How Money Is Received
Interest payments are received from the issuer at periodic intervals which are determined for each security at the time of issue All payment documentation must be maintained in the Fund's files
Payment Methods
Interest payments can be received through a variety of channels, including: Depository Trust Company (DTC) Fed Book Entry (FBE) Participants Trust Company (PTC) Wires Lockbox Complete On-line Method Portfolio Appraisal Safekeeping System (COMPASS) Checks
DTC
Notification of payments received for securities held in DTC is received by the PA in the form of a DTC Dividend and Interest Income sheet DTC dividend and interest payments are credited to the Fund's DDA by the DTC Unit in the Quincy Securities Processing area
FBE
Payments for FBE items are made through the FBE System The Fed desk notifies the PA of income received via a Fed 3E sheet In order for the payment to be deposited into the Fund's DDA, the PA must submit a DDA credit ticket to the Fed desk in the Quincy Securities Processing area
PTC
The PA receives a PTC Principal & Interest Report as notification of principal and interest payments that are made on mortgage backed securities held in PTC The PA must submit a DDA credit ticket to the PTC desk in Quincy Securities Processing in order for the payment to be deposited in the Fund's DDA
Wires
Payments sent to the Bank via Fed wire are deposited to a central account, the Master Money Transfer Account (MMTA) The monies are transferred from the MMTA account to the appropriate mutual fund DDA, usually by the Wire Processing Unit The PA receives a hard copy of the wire either the same day or the next day, which identifies the monies deposited in the DDA
Lockbox
Many banks offer Lockbox services which collect, deposit, and credit monies fast and efficiently, reducing mail float by operating close to major money center banks State Street uses Midlantic Bank in Jersey City, New Jersey, as its Lockbox bank Midlantic Bank wires the money it has collected to State Street and sends photocopies of the checks as a backup Quincy Securities Processing collects the payments and distributes payment notification to the appropriate Portfolio Administrator (PA) In order to collect the income, the PA submits a Demand Deposit Account (DDA) credit ticket to the Lockbox desk located in the Quincy Securities Processing area The payment amount is then deposited in the Fund's custodian account, and the PA receives the photocopy of the check sent by Midlantic Bank
Compass
COMPASS, a computer system unique to State Street Bank ,is used to collect interest on coupon bonds held in the Boston Vault The COMPASS system produces a coupon cutting slip which is the Vault's notification and authorization to detach and submit the coupon for collection Payments received for revolving notes or overnight investments held in Boston are sent through COMPASS Quincy Securities Processing distributes notification of COMPASS payments to the appropriate PA In order to collect the income, the PA must submit a DDA credit ticket to the Lockbox desk located in the Quincy Securities Processing area The payment amount is then deposited in the Fund's custodian account
Checks
Checks are sent by paying agents through the mail to the Bank Once received, the checks are sorted in the mail room according to the Fund's nominee name The check is then forwarded to the First Line Manager - Securities & Cash Processing The PA must deposit the check to the DDA using a deposit ticket
Debt securities pay interest A debt security is an instrument issued by a corporation, the US Government, a government agency, or a municipality to raise capital The purchaser of a debt security has, in effect, made a loan to the issuer The amount of the loan is the principal amount of the security, and interest represents the cost to the issuer for use of the principal Debt issues are often accompanied by a supplementary indenture which defines the various terms of the loan,including the following:
*par value
* maturity date
* interest rate
* rate or index to which variable rate is tied
* interest payment dates
* any redemption rights or call privileges
* any principal paydown or sinking fund features
If the issuer of a security fails to either make a scheduled interest or principal payment or to meet some other provision of the security's indenture, that security is considered to be in default Default may lead to the issuer declaring bankruptcy Debt securities include corporate bonds and notes, USTreasury bonds and notes, municipal bonds, debentures, mortgage-backed securities, variable rate demand notes,commercial paper, US Treasury bills, domestic and Eurodollar certificates of deposit, banker's acceptances, and repurchase agreements
Accrual Basis
The accrual basis is a method used to account for interest earned on debt securities Interest is accounted for over the time period in which it is earned, regardless of when cash payment is received The number of days in a security's payment period must be determined in order to properly reflect the accrued interest Provisions for the accrual basis are stated in a security's indenture Most long-term (maturing in more than one year) debt securities accrue interest income for 30 days per monthover 360 days per year This is commonly known as "30/360" Others accrue interest for each day of the month over each day of the year This is known as "actual/actual" Most short-term (maturing in one year or less) securities accrue interest for each day of their life over a 360-day year This is known as "actual/360"
Accrual Basis Schedule
SECURITY
DAYS/MONTH
DAYS/YEAR
corporate bonds & notes
30
360
GNMAs/FNMAs/FHLMCs
30
360
banker's acceptances
actual
360
certificates of deposit
actual
360
commercial paper
actual
360
US treasury notes & bonds
actual
360
municipal bonds
actual or 30
actual or 360
VRDNs
actual or 30
actual or 360
Periodic Payments
Interest is paid by the issuer of a debt security as compensation for the issuer's use of money Interest payments are received at regular intervals that are determined when the security is first issued Interest payments on long-term securities are usually received periodically, on a monthly, quarterly, or semi-annual schedule Interest on short-term (money market) securities is usually received when the security matures However, interest on variable rate securities may be received monthly, quarterly, or semi-annually Once a corporation, municipality, or government agency has issued debt, it is legally obligated to make interest payments on each designated payment date, regardless of whether the issuer earns income or incursa loss
Payment Schedule
The chart below lists the frequency of interest payments for various types of securities SECURITY PAYS GNMAs/FNMAs/FHLMCs monthlyVRDNs monthly, quarterly or semiannually corporate bonds & notes semiannually municipal bonds semiannually US treasury notes & bonds semiannually banker's acceptances at maturity certificates of deposit at maturitycommercial paper at maturity US treasury bills at maturity
Fixed Vs Variable Rates
Securities issued at a fixed rate of interest accrue income at a constant interest rate for the life of thesecurity The interest rate is determined when the security is issued and does not change
Variable Rates
Variable rate securities are not issued at a specific interest rate Instead, the interest rate changes according to parameters specified when the security isissued The rates may change daily, weekly, or monthly, or when a specific index/rate to which the interest rate is tied (eg, the prime lending rate) changes The frequency of rate changes is determined when the security is issued Although rates change, payment dates do not Payments must be disbursed as specified in the indenture Variable rate securities are usually either municipal bonds or money market instruments, so both long-term and short-term securities may have variable rates These securities may also be known as floating rate items or variable rate demand notes (VRDNs)
Interest Bought And Sold
When a debt security is purchased or sold after issue date and between interest payment dates, interest is purchased from the previous owner, or is sold to the buyer, respectively This interest amount represents the interest that the previous owner has earned since the last payment date The previous owner receives this amount from the buyer upon settlement because, on the next payment date, the buyer will be the holder of record and will receive an interest payment for the entire pay period Interest bought is reflected in the following accounting entry:
DR Interest Receivable CR Payable for Investments Purchased
Interest sold is reflected in the following accounting entry:
DR Receivable for Investments Sold CR Interest Receivable
Interest Receivable
Interest Receivable represents interest that has been accrued and accounted for but not yet received in cash The Interest Receivable account on the Trial Balance is an asset account Its balance is affected by interest bought or sold, interest income accruals, and interest payments received Interest income is accrued and accounted for daily A fund is entitled to interest income on a debt security for each day that it holds that security Accounting for interest income is reflected in the following accounting entry:
DR Interest Receivable CR Interest Income
Interest payments represent income earned on an interest bearing debt security Interest is paid by the issuer of a security to the holder of record at periodic intervals that are determined when the security is issued The receipt of interest payments is reflected in the following accounting entry:
DR Cash CR Interest Receivable
Interest At Maturity
A debt security's maturity date is the date on which principal and all outstanding interest becomes due and payable Maturity date is determined when the security is originally issued Most long-term interest bearing securities and some short-term securities, such as variable rate demand notes (VRDNs), have regularly scheduled interest payment dates Only the final interest payment will be received with the principal payment when these items mature, since the holder of the security has received interest payments throughout the life of the security In contrast, all of the interest that has been accrued on most short-term securities is received when the security matures In either case, the following accounting entry records a security's maturity:
DR Cash CR Cost CR Interest Receivable
How Money Is Received
Interest payments are received from the issuer at periodic intervals which are determined for each security at the time of issue All payment documentation must be maintained in the Fund's files
Payment Methods
Interest payments can be received through a variety of channels, including: Depository Trust Company (DTC) Fed Book Entry (FBE) Participants Trust Company (PTC) Wires Lockbox Complete On-line Method Portfolio Appraisal Safekeeping System (COMPASS) Checks
DTC
Notification of payments received for securities held in DTC is received by the PA in the form of a DTC Dividend and Interest Income sheet DTC dividend and interest payments are credited to the Fund's DDA by the DTC Unit in the Quincy Securities Processing area
FBE
Payments for FBE items are made through the FBE System The Fed desk notifies the PA of income received via a Fed 3E sheet In order for the payment to be deposited into the Fund's DDA, the PA must submit a DDA credit ticket to the Fed desk in the Quincy Securities Processing area
PTC
The PA receives a PTC Principal & Interest Report as notification of principal and interest payments that are made on mortgage backed securities held in PTC The PA must submit a DDA credit ticket to the PTC desk in Quincy Securities Processing in order for the payment to be deposited in the Fund's DDA
Wires
Payments sent to the Bank via Fed wire are deposited to a central account, the Master Money Transfer Account (MMTA) The monies are transferred from the MMTA account to the appropriate mutual fund DDA, usually by the Wire Processing Unit The PA receives a hard copy of the wire either the same day or the next day, which identifies the monies deposited in the DDA
Lockbox
Many banks offer Lockbox services which collect, deposit, and credit monies fast and efficiently, reducing mail float by operating close to major money center banks State Street uses Midlantic Bank in Jersey City, New Jersey, as its Lockbox bank Midlantic Bank wires the money it has collected to State Street and sends photocopies of the checks as a backup Quincy Securities Processing collects the payments and distributes payment notification to the appropriate Portfolio Administrator (PA) In order to collect the income, the PA submits a Demand Deposit Account (DDA) credit ticket to the Lockbox desk located in the Quincy Securities Processing area The payment amount is then deposited in the Fund's custodian account, and the PA receives the photocopy of the check sent by Midlantic Bank
Compass
COMPASS, a computer system unique to State Street Bank ,is used to collect interest on coupon bonds held in the Boston Vault The COMPASS system produces a coupon cutting slip which is the Vault's notification and authorization to detach and submit the coupon for collection Payments received for revolving notes or overnight investments held in Boston are sent through COMPASS Quincy Securities Processing distributes notification of COMPASS payments to the appropriate PA In order to collect the income, the PA must submit a DDA credit ticket to the Lockbox desk located in the Quincy Securities Processing area The payment amount is then deposited in the Fund's custodian account
Checks
Checks are sent by paying agents through the mail to the Bank Once received, the checks are sorted in the mail room according to the Fund's nominee name The check is then forwarded to the First Line Manager - Securities & Cash Processing The PA must deposit the check to the DDA using a deposit ticket
Dividends
Dividends
Equity securities pay dividends. An equity security is a security issued by a corporation representing ownership in that corporation. Equity securities have no maturity or expiration date; they are in existance for the life of the corporation. Examples of equity securities are common stock and preferred stock. A dividend represents a distribution of a corporation's net earnings to shareholders. The dividend amount is determined by the corporation's Board of Directors and is usually paid quarterly. However, a corporation is not obligated to pay a dividend to its shareholders. Dividends may be paid in cash, stock, or property.
CASH DIVIDENDS
A cash dividend is a cash payment that is made to the shareholders of a corporation. It represents a distribution of the corporation's current earnings or accumulated profits. Cash dividends are often paid quarterly and are taxable as income in the year in which they are received. A corporation sometimes issues an extra dividend at year end if its earnings are satisfactory. The amount of the dividend fluctuates with earnings and the corporation's need for funds.
STOCK DIVIDENDS
A stock dividend is the payment of a corporate dividend in the form of shares of the corporation's stock. Stock dividends are not taxed when they are received, but rather when the securities are sold.
PROPERTY DIVIDENDS
A property dividend is the payment of a corporate dividend in the form of physical property, such as merchandise or shares of another corporation. The latter may happen when the corporation paying the dividend spins off a subsidiary to its shareholders. Merchandise received as a property dividend is valued at current market value and is taxable when it is received. Shares of stock may or may not be taxed when they are received, depending upon any rulings made regarding the distribution. Commerce Clearing House New Matters should be consulted to determine the taxability of a particular distribution.
Periodic Payments
A cash dividend represents a distribution of earnings to the owners or stockholders of a corporation. These distributions are usually made quarterly, as authorized by the corporation's Board of Directors. Occasionally a special dividend may be declared. Because a corporation is not obligated to pay a dividend, payments are usually made to stockholders only when the earnings are satisfactory.
DECLARATION DATE
Declaration date is the date on which a corporation announces that a dividend will be paid to the corporation's shareholders. All dividends must be authorized by the Board of Directors.
EX-DATE
Ex-date is the date which determines whether the owner of a security is entitled to the current dividend. The holder of a security is eligible to receive a dividend if the security is owned prior to the beginning of trading on ex-date. Dividends are posted as income to a fund on ex-date with the following accounting entry:
DR Dividends Receivable CR Dividend Income.
Also, on ex-date the price of the security should drop by the approximate amount of the dividend. NOTE: If a security is purchased on or after ex-date, the new owner is NOT eligible to receive the current dividend.
RECORD DATE
Record date is the date set by a corporation's Board of Director's which determines eligibility to receive a currently declared dividend. Those parties who are "on record" with the security's transfer agent on this date will receive the dividend, regardless of whether they are entitled to it. Record date usually occurs four business days after ex-date.
PAYABLE DATE
Payable date is the date on which a dividend is paid by the paying agent. The receipt of dividend payments is posted to the Fund's records with the following accounting entry:
DR Cash CR Dividends Receivable.
Other Distributions
In addition to dividends, a corporation may offer other distributions to its shareholders.
STOCK SPLITS
A corporation announces a stock split in order to increase the number of common shares outstanding. The stock split divides the outstanding shares of stock into a larger number of shares, without changing each shareholder's total value of stock or proportionate ownership of the corporation. The increase in the number of shares reduces the price per share proportionately, causing the stock to be more affordable to investors.
REVERSE STOCK SPLIT
A reverse stock split reduces the number of outstandingshares of a security. This reduction does not change the shareholder's proportionate ownership. However, the reduction in shares proportionately increases the market price per share. The increase in value makes the security more attractive to investors who avoid low-priced stocks.
WARRANTS
A warrant is a security usually issued in connection with a new issue of stocks or bonds, which entitles the holder to buy a proportionate amount of common stock at a specified price. This price is usually higher than the common stock's market price at the time that the warrants are issued. Warrants either expire on a fixed date or last indefinitely.
RIGHTS OFFERINGS
Stock rights may be offered by a corporation as either a new offering or a defensive measure against takeover attempts.
New Offering
When a new offering of common stock is made by a corporation, existing shareholders may be issued stock rights which entitle them to purchase the new shares at a specified price below market value. These rights are usually issued in certificate form and have a set expiration date approximately two to four weeks from the date of issue. Rights of this type can be traded on the open market.
Defensive Rights
Many corporations are currently assigning rights to their outstanding shares. These rights are usually not physically issued or exercisable unless a person or a group acquires 20% of outstanding stock. This is a defense against a takeover attempt. These rights usually expire after ten years.
How Money is Received
Dividend payments are received from a corporation's paying agent on payable dates that are authorized by the corporation's Board of Directors. All payment documentation must be maintained in the Fund's files.
PAYMENT METHODS
Dividend payments can be received through a variety of channels, including: * Depository Trust Company (DTC) * Lockbox * Checks
DTC
Notification of payments received for securities held in DTC is received by the PA in the form of a DTC Dividend and Interest Income sheet. DTC dividend payments are automatically credited to the Fund's DDA by the DTC Unit in the Quincy Securities Processing area.
Lockbox
Many banks offer Lockbox services which collect, deposit, and credit monies fast and efficiently, reducing mail float by operating close to major money center banks. State Street uses Midlantic Bank in Jersey City, New Jersey, as its Lockbox bank. Midlantic Bank wires the money it has collected to State Street and sends photocopies of the checks as a backup. Quincy Securities Processing collects the payments and distributes payment notification to the appropriate Portfolio Administrator (PA). In order to collect the income, the PA must bring a Demand Deposit Account (DDA) credit ticket to the Lockbox desk located in the Quincy Securities Processing area. The payment amount is then deposited in the Fund's custodian account, and the PA receives the photocopy of the check sent by Midlantic Bank.
Checks
Checks are sent by paying agents through the mail to the Bank. Once received, the checks are sorted in the mail room according to the Fund's nominee name. The check is then forwarded to the First Line Manager - Securites & Cash Processing. The PA must deposit the DDA check to the DDA using a deposit ticket.
Equity securities pay dividends. An equity security is a security issued by a corporation representing ownership in that corporation. Equity securities have no maturity or expiration date; they are in existance for the life of the corporation. Examples of equity securities are common stock and preferred stock. A dividend represents a distribution of a corporation's net earnings to shareholders. The dividend amount is determined by the corporation's Board of Directors and is usually paid quarterly. However, a corporation is not obligated to pay a dividend to its shareholders. Dividends may be paid in cash, stock, or property.
CASH DIVIDENDS
A cash dividend is a cash payment that is made to the shareholders of a corporation. It represents a distribution of the corporation's current earnings or accumulated profits. Cash dividends are often paid quarterly and are taxable as income in the year in which they are received. A corporation sometimes issues an extra dividend at year end if its earnings are satisfactory. The amount of the dividend fluctuates with earnings and the corporation's need for funds.
STOCK DIVIDENDS
A stock dividend is the payment of a corporate dividend in the form of shares of the corporation's stock. Stock dividends are not taxed when they are received, but rather when the securities are sold.
PROPERTY DIVIDENDS
A property dividend is the payment of a corporate dividend in the form of physical property, such as merchandise or shares of another corporation. The latter may happen when the corporation paying the dividend spins off a subsidiary to its shareholders. Merchandise received as a property dividend is valued at current market value and is taxable when it is received. Shares of stock may or may not be taxed when they are received, depending upon any rulings made regarding the distribution. Commerce Clearing House New Matters should be consulted to determine the taxability of a particular distribution.
Periodic Payments
A cash dividend represents a distribution of earnings to the owners or stockholders of a corporation. These distributions are usually made quarterly, as authorized by the corporation's Board of Directors. Occasionally a special dividend may be declared. Because a corporation is not obligated to pay a dividend, payments are usually made to stockholders only when the earnings are satisfactory.
DECLARATION DATE
Declaration date is the date on which a corporation announces that a dividend will be paid to the corporation's shareholders. All dividends must be authorized by the Board of Directors.
EX-DATE
Ex-date is the date which determines whether the owner of a security is entitled to the current dividend. The holder of a security is eligible to receive a dividend if the security is owned prior to the beginning of trading on ex-date. Dividends are posted as income to a fund on ex-date with the following accounting entry:
DR Dividends Receivable CR Dividend Income.
Also, on ex-date the price of the security should drop by the approximate amount of the dividend. NOTE: If a security is purchased on or after ex-date, the new owner is NOT eligible to receive the current dividend.
RECORD DATE
Record date is the date set by a corporation's Board of Director's which determines eligibility to receive a currently declared dividend. Those parties who are "on record" with the security's transfer agent on this date will receive the dividend, regardless of whether they are entitled to it. Record date usually occurs four business days after ex-date.
PAYABLE DATE
Payable date is the date on which a dividend is paid by the paying agent. The receipt of dividend payments is posted to the Fund's records with the following accounting entry:
DR Cash CR Dividends Receivable.
Other Distributions
In addition to dividends, a corporation may offer other distributions to its shareholders.
STOCK SPLITS
A corporation announces a stock split in order to increase the number of common shares outstanding. The stock split divides the outstanding shares of stock into a larger number of shares, without changing each shareholder's total value of stock or proportionate ownership of the corporation. The increase in the number of shares reduces the price per share proportionately, causing the stock to be more affordable to investors.
REVERSE STOCK SPLIT
A reverse stock split reduces the number of outstandingshares of a security. This reduction does not change the shareholder's proportionate ownership. However, the reduction in shares proportionately increases the market price per share. The increase in value makes the security more attractive to investors who avoid low-priced stocks.
WARRANTS
A warrant is a security usually issued in connection with a new issue of stocks or bonds, which entitles the holder to buy a proportionate amount of common stock at a specified price. This price is usually higher than the common stock's market price at the time that the warrants are issued. Warrants either expire on a fixed date or last indefinitely.
RIGHTS OFFERINGS
Stock rights may be offered by a corporation as either a new offering or a defensive measure against takeover attempts.
New Offering
When a new offering of common stock is made by a corporation, existing shareholders may be issued stock rights which entitle them to purchase the new shares at a specified price below market value. These rights are usually issued in certificate form and have a set expiration date approximately two to four weeks from the date of issue. Rights of this type can be traded on the open market.
Defensive Rights
Many corporations are currently assigning rights to their outstanding shares. These rights are usually not physically issued or exercisable unless a person or a group acquires 20% of outstanding stock. This is a defense against a takeover attempt. These rights usually expire after ten years.
How Money is Received
Dividend payments are received from a corporation's paying agent on payable dates that are authorized by the corporation's Board of Directors. All payment documentation must be maintained in the Fund's files.
PAYMENT METHODS
Dividend payments can be received through a variety of channels, including: * Depository Trust Company (DTC) * Lockbox * Checks
DTC
Notification of payments received for securities held in DTC is received by the PA in the form of a DTC Dividend and Interest Income sheet. DTC dividend payments are automatically credited to the Fund's DDA by the DTC Unit in the Quincy Securities Processing area.
Lockbox
Many banks offer Lockbox services which collect, deposit, and credit monies fast and efficiently, reducing mail float by operating close to major money center banks. State Street uses Midlantic Bank in Jersey City, New Jersey, as its Lockbox bank. Midlantic Bank wires the money it has collected to State Street and sends photocopies of the checks as a backup. Quincy Securities Processing collects the payments and distributes payment notification to the appropriate Portfolio Administrator (PA). In order to collect the income, the PA must bring a Demand Deposit Account (DDA) credit ticket to the Lockbox desk located in the Quincy Securities Processing area. The payment amount is then deposited in the Fund's custodian account, and the PA receives the photocopy of the check sent by Midlantic Bank.
Checks
Checks are sent by paying agents through the mail to the Bank. Once received, the checks are sorted in the mail room according to the Fund's nominee name. The check is then forwarded to the First Line Manager - Securites & Cash Processing. The PA must deposit the DDA check to the DDA using a deposit ticket.
Foreign Exchange
Foreign Exchange
An agreement between two parties by which a seller agrees to deliver a specified quantity of an asset at a future date. Forward contracts are not standardized.
An agreement between two parties by which a seller agrees to deliver a specified quantity of an asset at a future date. Forward contracts are not standardized.
Income
Accounting
Income
Interest Income
Securities Which Pay Interest
Debt securities pay interest A debt security is an instrument issued by a corporation, the US Government, a government agency, or a municipality to raise capital The purchaser of a debt security has, in effect, made a loan to the issuer The amount of the loan is the principal amount of the security, and interest represents the cost to the issuer for use of the principal Debt issues are often accompanied by a supplementary indenture which defines the various terms of the loan,including the following:
*par value * maturity date * interest rate * rate or index to which variable rate is tied* interest payment dates * any redemption rights or call privileges * any principal paydown or sinking fund features
If the issuer of a security fails to either make a scheduled interest or principal payment or to meet some other provision of the security's indenture, that security is considered to be in default Default may lead to the issuer declaring bankruptcy Debt securities include corporate bonds and notes, USTreasury bonds and notes, municipal bonds, debentures, mortgage-backed securities, variable rate demand notes,commercial paper, US Treasury bills, domestic and Eurodollar certificates of deposit, banker's acceptances, and repurchase agreements
Accrual Basis
The accrual basis is a method used to account for interest earned on debt securities Interest is accounted for over the time period in which it is earned, regardless of when cash payment is received The number of days in a security's payment period must be determined in order to properly reflect the accrued interest Provisions for the accrual basis are stated in a security's indenture Most long-term (maturing in more than one year) debt securities accrue interest income for 30 days per monthover 360 days per year This is commonly known as "30/360" Others accrue interest for each day of the month over each day of the year This is known as "actual/actual" Most short-term (maturing in one year or less) securities accrue interest for each day of their life over a 360-day year This is known as "actual/360"
Accrual Basis Schedule
SECURITY
DAYS/MONTH
DAYS/YEAR
corporate bonds & notes
30
360
GNMAs/FNMAs/FHLMCs
30
360
banker's acceptances
actual
360
certificates of deposit
actual
360
commercial paper
actual
360
US treasury notes & bonds
actual
360
municipal bonds
actual or 30
actual or 360
VRDNs
actual or 30
actual or 360
Periodic Payments
Interest is paid by the issuer of a debt security as compensation for the issuer's use of money Interest payments are received at regular intervals that are determined when the security is first issued Interest payments on long-term securities are usually received periodically, on a monthly, quarterly, or semi-annual schedule Interest on short-term (money market) securities is usually received when the security matures However, interest on variable rate securities may be received monthly, quarterly, or semi-annually Once a corporation, municipality, or government agency has issued debt, it is legally obligated to make interest payments on each designated payment date, regardless of whether the issuer earns income or incursa loss
Payment Schedule
The chart below lists the frequency of interest payments for various types of securities SECURITY PAYS GNMAs/FNMAs/FHLMCs monthlyVRDNs monthly, quarterly or semiannually corporate bonds & notes semiannually municipal bonds semiannually US treasury notes & bonds semiannually banker's acceptances at maturity certificates of deposit at maturitycommercial paper at maturity US treasury bills at maturity
Fixed Vs Variable Rates
Securities issued at a fixed rate of interest accrue income at a constant interest rate for the life of thesecurity The interest rate is determined when the security is issued and does not change
Variable Rates
Variable rate securities are not issued at a specific interest rate Instead, the interest rate changes according to parameters specified when the security isissued The rates may change daily, weekly, or monthly, or when a specific index/rate to which the interest rate is tied (eg, the prime lending rate) changes The frequency of rate changes is determined when the security is issued Although rates change, payment dates do not Payments must be disbursed as specified in the indenture Variable rate securities are usually either municipal bonds or money market instruments, so both long-term and short-term securities may have variable rates These securities may also be known as floating rate items or variable rate demand notes (VRDNs)
Interest Bought And Sold
When a debt security is purchased or sold after issue date and between interest payment dates, interest is purchased from the previous owner, or is sold to the buyer, respectively This interest amount represents the interest that the previous owner has earned since the last payment date The previous owner receives this amount from the buyer upon settlement because, on the next payment date, the buyer will be the holder of record and will receive an interest payment for the entire pay period Interest bought is reflected in the following accounting entry:
DR Interest Receivable CR Payable for Investments Purchased
Interest sold is reflected in the following accounting entry:
DR Receivable for Investments Sold CR Interest Receivable
Interest Receivable
Interest Receivable represents interest that has been accrued and accounted for but not yet received in cash The Interest Receivable account on the Trial Balance is an asset account Its balance is affected by interest bought or sold, interest income accruals, and interest payments received Interest income is accrued and accounted for daily A fund is entitled to interest income on a debt security for each day that it holds that security Accounting for interest income is reflected in the following accounting entry:
DR Interest Receivable CR Interest Income
Interest payments represent income earned on an interest bearing debt security Interest is paid by the issuer of a security to the holder of record at periodic intervals that are determined when the security is issued The receipt of interest payments is reflected in the following accounting entry:
DR Cash CR Interest Receivable
Interest At Maturity
A debt security's maturity date is the date on which principal and all outstanding interest becomes due and payable Maturity date is determined when the security is originally issued Most long-term interest bearing securities and some short-term securities, such as variable rate demand notes (VRDNs), have regularly scheduled interest payment dates Only the final interest payment will be received with the principal payment when these items mature, since the holder of the security has received interest payments throughout the life of the security In contrast, all of the interest that has been accrued on most short-term securities is received when the security matures In either case, the following accounting entry records a security's maturity:
DR Cash CR Cost CR Interest Receivable
How Money Is Received
Interest payments are received from the issuer at periodic intervals which are determined for each security at the time of issue All payment documentation must be maintained in the Fund's files
Payment Methods
Interest payments can be received through a variety of channels, including: Depository Trust Company (DTC) Fed Book Entry (FBE) Participants Trust Company (PTC) Wires Lockbox Complete On-line Method Portfolio Appraisal Safekeeping System (COMPASS) Checks
DTC
Notification of payments received for securities held in DTC is received by the PA in the form of a DTC Dividend and Interest Income sheet DTC dividend and interest payments are credited to the Fund's DDA by the DTC Unit in the Quincy Securities Processing area
FBE
Payments for FBE items are made through the FBE System The Fed desk notifies the PA of income received via a Fed 3E sheet In order for the payment to be deposited into the Fund's DDA, the PA must submit a DDA credit ticket to the Fed desk in the Quincy Securities Processing area
PTC
The PA receives a PTC Principal & Interest Report as notification of principal and interest payments that are made on mortgage backed securities held in PTC The PA must submit a DDA credit ticket to the PTC desk in Quincy Securities Processing in order for the payment to be deposited in the Fund's DDA
Wires
Payments sent to the Bank via Fed wire are deposited to a central account, the Master Money Transfer Account (MMTA) The monies are transferred from the MMTA account to the appropriate mutual fund DDA, usually by the Wire Processing Unit The PA receives a hard copy of the wire either the same day or the next day, which identifies the monies deposited in the DDA
Lockbox
Many banks offer Lockbox services which collect, deposit, and credit monies fast and efficiently, reducing mail float by operating close to major money center banks State Street uses Midlantic Bank in Jersey City, New Jersey, as its Lockbox bank Midlantic Bank wires the money it has collected to State Street and sends photocopies of the checks as a backup Quincy Securities Processing collects the payments and distributes payment notification to the appropriate Portfolio Administrator (PA) In order to collect the income, the PA submits a Demand Deposit Account (DDA) credit ticket to the Lockbox desk located in the Quincy Securities Processing area The payment amount is then deposited in the Fund's custodian account, and the PA receives the photocopy of the check sent by Midlantic Bank
Compass
COMPASS, a computer system unique to State Street Bank ,is used to collect interest on coupon bonds held in the Boston Vault The COMPASS system produces a coupon cutting slip which is the Vault's notification and authorization to detach and submit the coupon for collection Payments received for revolving notes or overnight investments held in Boston are sent through COMPASS Quincy Securities Processing distributes notification of COMPASS payments to the appropriate PA In order to collect the income, the PA must submit a DDA credit ticket to the Lockbox desk located in the Quincy Securities Processing area The payment amount is then deposited in the Fund's custodian account
Checks
Checks are sent by paying agents through the mail to the Bank Once received, the checks are sorted in the mail room according to the Fund's nominee name The check is then forwarded to the First Line Manager - Securities & Cash Processing The PA must deposit the check to the DDA using a deposit ticket
Income
Interest Income
Securities Which Pay Interest
Debt securities pay interest A debt security is an instrument issued by a corporation, the US Government, a government agency, or a municipality to raise capital The purchaser of a debt security has, in effect, made a loan to the issuer The amount of the loan is the principal amount of the security, and interest represents the cost to the issuer for use of the principal Debt issues are often accompanied by a supplementary indenture which defines the various terms of the loan,including the following:
*par value * maturity date * interest rate * rate or index to which variable rate is tied* interest payment dates * any redemption rights or call privileges * any principal paydown or sinking fund features
If the issuer of a security fails to either make a scheduled interest or principal payment or to meet some other provision of the security's indenture, that security is considered to be in default Default may lead to the issuer declaring bankruptcy Debt securities include corporate bonds and notes, USTreasury bonds and notes, municipal bonds, debentures, mortgage-backed securities, variable rate demand notes,commercial paper, US Treasury bills, domestic and Eurodollar certificates of deposit, banker's acceptances, and repurchase agreements
Accrual Basis
The accrual basis is a method used to account for interest earned on debt securities Interest is accounted for over the time period in which it is earned, regardless of when cash payment is received The number of days in a security's payment period must be determined in order to properly reflect the accrued interest Provisions for the accrual basis are stated in a security's indenture Most long-term (maturing in more than one year) debt securities accrue interest income for 30 days per monthover 360 days per year This is commonly known as "30/360" Others accrue interest for each day of the month over each day of the year This is known as "actual/actual" Most short-term (maturing in one year or less) securities accrue interest for each day of their life over a 360-day year This is known as "actual/360"
Accrual Basis Schedule
SECURITY
DAYS/MONTH
DAYS/YEAR
corporate bonds & notes
30
360
GNMAs/FNMAs/FHLMCs
30
360
banker's acceptances
actual
360
certificates of deposit
actual
360
commercial paper
actual
360
US treasury notes & bonds
actual
360
municipal bonds
actual or 30
actual or 360
VRDNs
actual or 30
actual or 360
Periodic Payments
Interest is paid by the issuer of a debt security as compensation for the issuer's use of money Interest payments are received at regular intervals that are determined when the security is first issued Interest payments on long-term securities are usually received periodically, on a monthly, quarterly, or semi-annual schedule Interest on short-term (money market) securities is usually received when the security matures However, interest on variable rate securities may be received monthly, quarterly, or semi-annually Once a corporation, municipality, or government agency has issued debt, it is legally obligated to make interest payments on each designated payment date, regardless of whether the issuer earns income or incursa loss
Payment Schedule
The chart below lists the frequency of interest payments for various types of securities SECURITY PAYS GNMAs/FNMAs/FHLMCs monthlyVRDNs monthly, quarterly or semiannually corporate bonds & notes semiannually municipal bonds semiannually US treasury notes & bonds semiannually banker's acceptances at maturity certificates of deposit at maturitycommercial paper at maturity US treasury bills at maturity
Fixed Vs Variable Rates
Securities issued at a fixed rate of interest accrue income at a constant interest rate for the life of thesecurity The interest rate is determined when the security is issued and does not change
Variable Rates
Variable rate securities are not issued at a specific interest rate Instead, the interest rate changes according to parameters specified when the security isissued The rates may change daily, weekly, or monthly, or when a specific index/rate to which the interest rate is tied (eg, the prime lending rate) changes The frequency of rate changes is determined when the security is issued Although rates change, payment dates do not Payments must be disbursed as specified in the indenture Variable rate securities are usually either municipal bonds or money market instruments, so both long-term and short-term securities may have variable rates These securities may also be known as floating rate items or variable rate demand notes (VRDNs)
Interest Bought And Sold
When a debt security is purchased or sold after issue date and between interest payment dates, interest is purchased from the previous owner, or is sold to the buyer, respectively This interest amount represents the interest that the previous owner has earned since the last payment date The previous owner receives this amount from the buyer upon settlement because, on the next payment date, the buyer will be the holder of record and will receive an interest payment for the entire pay period Interest bought is reflected in the following accounting entry:
DR Interest Receivable CR Payable for Investments Purchased
Interest sold is reflected in the following accounting entry:
DR Receivable for Investments Sold CR Interest Receivable
Interest Receivable
Interest Receivable represents interest that has been accrued and accounted for but not yet received in cash The Interest Receivable account on the Trial Balance is an asset account Its balance is affected by interest bought or sold, interest income accruals, and interest payments received Interest income is accrued and accounted for daily A fund is entitled to interest income on a debt security for each day that it holds that security Accounting for interest income is reflected in the following accounting entry:
DR Interest Receivable CR Interest Income
Interest payments represent income earned on an interest bearing debt security Interest is paid by the issuer of a security to the holder of record at periodic intervals that are determined when the security is issued The receipt of interest payments is reflected in the following accounting entry:
DR Cash CR Interest Receivable
Interest At Maturity
A debt security's maturity date is the date on which principal and all outstanding interest becomes due and payable Maturity date is determined when the security is originally issued Most long-term interest bearing securities and some short-term securities, such as variable rate demand notes (VRDNs), have regularly scheduled interest payment dates Only the final interest payment will be received with the principal payment when these items mature, since the holder of the security has received interest payments throughout the life of the security In contrast, all of the interest that has been accrued on most short-term securities is received when the security matures In either case, the following accounting entry records a security's maturity:
DR Cash CR Cost CR Interest Receivable
How Money Is Received
Interest payments are received from the issuer at periodic intervals which are determined for each security at the time of issue All payment documentation must be maintained in the Fund's files
Payment Methods
Interest payments can be received through a variety of channels, including: Depository Trust Company (DTC) Fed Book Entry (FBE) Participants Trust Company (PTC) Wires Lockbox Complete On-line Method Portfolio Appraisal Safekeeping System (COMPASS) Checks
DTC
Notification of payments received for securities held in DTC is received by the PA in the form of a DTC Dividend and Interest Income sheet DTC dividend and interest payments are credited to the Fund's DDA by the DTC Unit in the Quincy Securities Processing area
FBE
Payments for FBE items are made through the FBE System The Fed desk notifies the PA of income received via a Fed 3E sheet In order for the payment to be deposited into the Fund's DDA, the PA must submit a DDA credit ticket to the Fed desk in the Quincy Securities Processing area
PTC
The PA receives a PTC Principal & Interest Report as notification of principal and interest payments that are made on mortgage backed securities held in PTC The PA must submit a DDA credit ticket to the PTC desk in Quincy Securities Processing in order for the payment to be deposited in the Fund's DDA
Wires
Payments sent to the Bank via Fed wire are deposited to a central account, the Master Money Transfer Account (MMTA) The monies are transferred from the MMTA account to the appropriate mutual fund DDA, usually by the Wire Processing Unit The PA receives a hard copy of the wire either the same day or the next day, which identifies the monies deposited in the DDA
Lockbox
Many banks offer Lockbox services which collect, deposit, and credit monies fast and efficiently, reducing mail float by operating close to major money center banks State Street uses Midlantic Bank in Jersey City, New Jersey, as its Lockbox bank Midlantic Bank wires the money it has collected to State Street and sends photocopies of the checks as a backup Quincy Securities Processing collects the payments and distributes payment notification to the appropriate Portfolio Administrator (PA) In order to collect the income, the PA submits a Demand Deposit Account (DDA) credit ticket to the Lockbox desk located in the Quincy Securities Processing area The payment amount is then deposited in the Fund's custodian account, and the PA receives the photocopy of the check sent by Midlantic Bank
Compass
COMPASS, a computer system unique to State Street Bank ,is used to collect interest on coupon bonds held in the Boston Vault The COMPASS system produces a coupon cutting slip which is the Vault's notification and authorization to detach and submit the coupon for collection Payments received for revolving notes or overnight investments held in Boston are sent through COMPASS Quincy Securities Processing distributes notification of COMPASS payments to the appropriate PA In order to collect the income, the PA must submit a DDA credit ticket to the Lockbox desk located in the Quincy Securities Processing area The payment amount is then deposited in the Fund's custodian account
Checks
Checks are sent by paying agents through the mail to the Bank Once received, the checks are sorted in the mail room according to the Fund's nominee name The check is then forwarded to the First Line Manager - Securities & Cash Processing The PA must deposit the check to the DDA using a deposit ticket
Equity
Equity
Equity Securities represent the ownership of a corporation. For example, if an investor purchased 50 shares out of 1000 outstanding XYZ shares, this investor owns 50/1000 of the XYZ Corporation. A publicly held corporation, whose shares are traded over a recognized Exchange, can have literally thousands of shareholders or owners. Investors can sell or buy shares anytime, as they wish. In the U.S., the New York Stock Exchange and the American Stock Exchange are two of the exchanges which match sellers of equity shares with buyers.
Corporations issue equities in order to raise money for business growth. The amount of authorized stock must be approved by the Securities And Exchange Commission (SEC) and the State Secretary of the state under which the corporation is chartered. This protects the investor from fraudulent securities issues or undue dilution of value of existing shares due to new issues. The Securities and Exchange Commission requires that the corporation file a Prospectus of each new securities issue. This prospectus sets forth the terms of the issue and contains pertinent data about the corporation, and is available to all potential investors.
Equity Links
Use following links to learn more about Equity Securities.
Why Equity Investment ?
Types of Equity Securities
Equity Buy/Sell Trade - Examples
For More Information. . .
Accounting Treatment
Pricing Data
Equity Securities represent the ownership of a corporation. For example, if an investor purchased 50 shares out of 1000 outstanding XYZ shares, this investor owns 50/1000 of the XYZ Corporation. A publicly held corporation, whose shares are traded over a recognized Exchange, can have literally thousands of shareholders or owners. Investors can sell or buy shares anytime, as they wish. In the U.S., the New York Stock Exchange and the American Stock Exchange are two of the exchanges which match sellers of equity shares with buyers.
Corporations issue equities in order to raise money for business growth. The amount of authorized stock must be approved by the Securities And Exchange Commission (SEC) and the State Secretary of the state under which the corporation is chartered. This protects the investor from fraudulent securities issues or undue dilution of value of existing shares due to new issues. The Securities and Exchange Commission requires that the corporation file a Prospectus of each new securities issue. This prospectus sets forth the terms of the issue and contains pertinent data about the corporation, and is available to all potential investors.
Equity Links
Use following links to learn more about Equity Securities.
Why Equity Investment ?
Types of Equity Securities
Equity Buy/Sell Trade - Examples
For More Information. . .
Accounting Treatment
Pricing Data
DEBT
Securities
Debt
In order to raise capital, a firm may issue DEBT SECURITIES. Issuing debt securities is, in effect, taking out a loan, with the buyers of the security being the lenders. The issuer of a debt security is therefore obligated to pay the buyers of the security INTEREST according to a predetermined schedule, and to return the investment PRINCIPAL to the investor at a specified future date, known as MATURITY DATE. LONG TERM DEBT is debt with a maturity date of one year or more after issue date. SHORT TERM DEBT is debt with a maturity date of less than one year after issue.
In some instances, an issuer of long term debt may wish to repay all of the outstanding principal on a debt security prior to the scheduled maturity date, thereby retiring the debt. This is known as a CALL. Calls can be made on the entire issue, or on only a portion of the issue. The right of the issuer to do this will be clearly stated in the security's prospectus.
The amount of interest that is paid on a debt security is determined by the stated percentage rate on the debt instrument, which may be a fixed or a variable rate. This is also detailed in the prospectus, along with the number of times per year and the dates on which payments will be made.
The buyer of a firm's debt has purchased the right to receive income as scheduled. This is in contrast to the purchaser of a firm's equity securities, who receives income only if dividends are declared by the company. The advantage of equity is that the investor can benefit by future growth of the company for the life of the company; the disadvantage of equity is that income is not guaranteed, and the investor may lose a significant amount of value on the security. The advantage of debt, on the other hand, is that the investor takes less risk since interest payments are a legal obligation of the issuer and must be paid as scheduled.
One reason that a firm may want to issue debt instead of equity is that the financial obligations incurred by the firm are of a more specific nature. The firm has a definite amount of money in both principal and interest that is to be paid back at specific times. This helps in the financial planning process since the firm knows when they will need to have money on hand.
Sometimes a debt issuer DEFAULTS on an obligation by failing to pay the scheduled interest or maturity proceeds. In these cases, the owners of a firm's debt securities are among the first in line with a claim to any liquidation of the assets of the company. Shareholders, as owners, are last in line.
All new security issues must be registered with the Securities and Exchange Commission (SEC). Registration involves the filing of financial statements regarding the firm and other related information. A firm wishing to issue debt must qualify by possessing adequate financial status within established guidelines. Issuing debt places constraints on the firm; because the firm has an obligation to repay creditors, it must maintain the ability to meet these commitments.
A debt security is usually REGISTERED in the name of the owner. The registered holder's name will appear on the debt certificate and on the books of the paying agent. Registered holders receive the interest payments and any applicable corporate action notifications.
INTEREST accrues from the date of issuance, also referred to as the dated date, to the first payment date, or from one payment date to the next. Interest accrued is interest which is earned to date, but not yet paid. Accrued interest is traded along with the security when a debt instrument is bought and sold. The buyer pays the seller an amount equal to the interest accrued thus far in the payment period.
"PAR" is the term used for the principal value, or the face value of a debt instrument, and is the amount that will be paid to the holder at maturity. Debt can be sold either at, below, or above par value.
A security can be issued at a DISCOUNT (below par) when the interest is scheduled to be paid only at maturity. Full par value is paid to the holder at maturity; thus the difference between the purchase price and the maturity value represents the income earned on the security. This type of arrangement is common with money market instruments, which have short-term maturities. A zero-coupon bond is an example of a long-term debt security issued at a discount.
Securities can also sell at a discount from the current accrued value if market interest rates have increased since the security was issued. A security with a stated rate below market value is less attractive to investors; a discounted price will help to equalize the value of the security in the marketplace.
Securities selling at a PREMIUM carry a price higher than the current accrued value of the par. This can happen if market interest rates have fallen since the security was issued, making the security with the relatively higher rate more attractive to investors.
COLLATERAL is an asset, owned or controlled by a borrower, which is pledged to a lender in exchange for a loan. The value of the collateral is generally equivalent to that of the loan. The lender is given ownership or liquidation rights to the collateral in the event of default by the borrower, thereby giving the lender some protection against loss. Usually, some type of collateral is required in order to take out a loan, as a guarantee that the loan will be repaid. Debt securities are often backed by collateral pledged by the issuer. This collateral could consist of other securities, real estate, or some other asset which has a value comparable to that of the loan. When a security is collateralized, it is referred to as "secured". A security that does not have collateral behind it is "unsecured".
A security may be issued as a PRIVATE PLACEMENT. A private placement occurs when a firm sells securities directly to an investor, bypassing the securities market, underwriters, or any middlemen. Reasons why a security may be placed privately include that this method avoids the registration and disclosure process, and provides greater flexibility to negotiate terms with the buyer.
Debt
In order to raise capital, a firm may issue DEBT SECURITIES. Issuing debt securities is, in effect, taking out a loan, with the buyers of the security being the lenders. The issuer of a debt security is therefore obligated to pay the buyers of the security INTEREST according to a predetermined schedule, and to return the investment PRINCIPAL to the investor at a specified future date, known as MATURITY DATE. LONG TERM DEBT is debt with a maturity date of one year or more after issue date. SHORT TERM DEBT is debt with a maturity date of less than one year after issue.
In some instances, an issuer of long term debt may wish to repay all of the outstanding principal on a debt security prior to the scheduled maturity date, thereby retiring the debt. This is known as a CALL. Calls can be made on the entire issue, or on only a portion of the issue. The right of the issuer to do this will be clearly stated in the security's prospectus.
The amount of interest that is paid on a debt security is determined by the stated percentage rate on the debt instrument, which may be a fixed or a variable rate. This is also detailed in the prospectus, along with the number of times per year and the dates on which payments will be made.
The buyer of a firm's debt has purchased the right to receive income as scheduled. This is in contrast to the purchaser of a firm's equity securities, who receives income only if dividends are declared by the company. The advantage of equity is that the investor can benefit by future growth of the company for the life of the company; the disadvantage of equity is that income is not guaranteed, and the investor may lose a significant amount of value on the security. The advantage of debt, on the other hand, is that the investor takes less risk since interest payments are a legal obligation of the issuer and must be paid as scheduled.
One reason that a firm may want to issue debt instead of equity is that the financial obligations incurred by the firm are of a more specific nature. The firm has a definite amount of money in both principal and interest that is to be paid back at specific times. This helps in the financial planning process since the firm knows when they will need to have money on hand.
Sometimes a debt issuer DEFAULTS on an obligation by failing to pay the scheduled interest or maturity proceeds. In these cases, the owners of a firm's debt securities are among the first in line with a claim to any liquidation of the assets of the company. Shareholders, as owners, are last in line.
All new security issues must be registered with the Securities and Exchange Commission (SEC). Registration involves the filing of financial statements regarding the firm and other related information. A firm wishing to issue debt must qualify by possessing adequate financial status within established guidelines. Issuing debt places constraints on the firm; because the firm has an obligation to repay creditors, it must maintain the ability to meet these commitments.
A debt security is usually REGISTERED in the name of the owner. The registered holder's name will appear on the debt certificate and on the books of the paying agent. Registered holders receive the interest payments and any applicable corporate action notifications.
INTEREST accrues from the date of issuance, also referred to as the dated date, to the first payment date, or from one payment date to the next. Interest accrued is interest which is earned to date, but not yet paid. Accrued interest is traded along with the security when a debt instrument is bought and sold. The buyer pays the seller an amount equal to the interest accrued thus far in the payment period.
"PAR" is the term used for the principal value, or the face value of a debt instrument, and is the amount that will be paid to the holder at maturity. Debt can be sold either at, below, or above par value.
A security can be issued at a DISCOUNT (below par) when the interest is scheduled to be paid only at maturity. Full par value is paid to the holder at maturity; thus the difference between the purchase price and the maturity value represents the income earned on the security. This type of arrangement is common with money market instruments, which have short-term maturities. A zero-coupon bond is an example of a long-term debt security issued at a discount.
Securities can also sell at a discount from the current accrued value if market interest rates have increased since the security was issued. A security with a stated rate below market value is less attractive to investors; a discounted price will help to equalize the value of the security in the marketplace.
Securities selling at a PREMIUM carry a price higher than the current accrued value of the par. This can happen if market interest rates have fallen since the security was issued, making the security with the relatively higher rate more attractive to investors.
COLLATERAL is an asset, owned or controlled by a borrower, which is pledged to a lender in exchange for a loan. The value of the collateral is generally equivalent to that of the loan. The lender is given ownership or liquidation rights to the collateral in the event of default by the borrower, thereby giving the lender some protection against loss. Usually, some type of collateral is required in order to take out a loan, as a guarantee that the loan will be repaid. Debt securities are often backed by collateral pledged by the issuer. This collateral could consist of other securities, real estate, or some other asset which has a value comparable to that of the loan. When a security is collateralized, it is referred to as "secured". A security that does not have collateral behind it is "unsecured".
A security may be issued as a PRIVATE PLACEMENT. A private placement occurs when a firm sells securities directly to an investor, bypassing the securities market, underwriters, or any middlemen. Reasons why a security may be placed privately include that this method avoids the registration and disclosure process, and provides greater flexibility to negotiate terms with the buyer.
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