The Sinking Fund should be used to model any type of public or privately traded bond or other debt security from any source (government, municipal, corporate or otherwise) that contains a level coupon rate until maturity and also includes a sinking fund provision where the issuer will periodically buy back portions of the outstanding debt issuance.
Cash Flows & Timing
All cash flows on the sinking fund product occur at the beginning of each projection month. Cash flows occur in the following order. Cash flows higher up the order may impact the amount of cash flows lower down.
- Redemptions (Sinking Fund repurchases)
- Default Recoveries
- Coupon Payments
- Principal Payments
Model Point File
The following fields are included on the default Slope Library model point file definition for Sinking Fund.
Asset ID – A string field that is used for identification purposes only. This could be an ID from your asset administration system, the CUSIP, or any other identifier for the model point.
Important: This field is used as the lookup key for the sinking fund schedule and must be synced up with the Sinking Fund Schedule table (see more below about the sinking fund table).
AVR Line Number – The line number this bond should appear in on the Asset Valuation Reserve. This value is used to lookup the appropriate factors for AVR calculation as well as the RBC C-1 Other factor to apply for Risked Based Capital.
Coupon Payments Per Year – The number of coupon payments made each year. This determines the frequency and amount of the periodic coupon payments. The formulas in this product expects this value to be evenly divisible into 12 in order to properly calculate the payment months (i.e. 1, 2, 4, 6, or 12).
Coupon Rate – The coupon rate of the bond that is used to determine the periodic bond payments. This rate should be entered as a bond-equivalent rate (not annual effective) to ensure the proper bond payments are calculated.
Currency – A string value specifying the currency the bond is denominated in. This value is used to look up rates from the economic scenario file for market value calculations as well as to set coupon rates on new business model points during the asset purchase process. The value specified here must match on the currencies specified on the economic scenario file definition.
Initial Book Value – The book value of the bond as of the projection start date.
Initial Market Value – The market value of the bond as of the projection start date.
Initial Par Value – The par value of the bond as of the projection start date.
Issue Date – The original issue date of the bond. This is used in conjunction with the Term in Months to determine the maturity date of the bond. It is also used to determine when coupon payments occur. This should be the original issue date of the bond, which may not necessarily be the date you purchased it.
NAIC SVO Rating – The bond rating from the NAIC Securities Valuation Office (SVO). This should be a value of 1-6 on callable bonds. This value is used to determine accounting treatment for statutory reporting.
Rating – The rating agency rating of the bond. This value is used to determine the default rates experienced. The default model expects this to be a Moody’s rating since the default lookup table is based on the Moody’s annual default study.
Spread – The credit spread over risk-free rates. This spread is expected to include the expected future risk of default inherent in the bond price. This value is used to calculation market values of the bond as well as when setting the coupon rate on new business model points.
Term in Months – The number of months from the original issue date of the bond to the maturity date. Ex. a 5 year bond would have a value of 60.
This section describes inputs that control how the product works that are not included on the model point file. If these inputs need to vary by model point, then you should modify the formulas to pull the data from an appropriate source.
Coupon Rate – The coupon rate on the bond. This value is read from the model point file Coupon Rate for all in force model points. On new business model points, the coupon rate is determined by looking up the yield curve rate from the scenario file that corresponds to the bond term and adding the Spread from the model point file to that value.
Default Rate – The default rate is the annual effective rate of defaults. This product is set up to read the default rates from a table which is based on the Moody’s default study. It uses the Rating from the model point file, and the number of years since issue to look up a default rate.
Default Recovery Rate – This specifies a percentage of the current market value of assets that default that will be recovered as cash. By default, this value is set as 0.
GAAP Classification – An integer value that indicates how the asset is reported on the GAAP Balance sheet. The following 3 options are available.
- Available For Sale (AFS)
- Held to Maturity (HTM)
AFS and Trading assets are held at Market (Fair) Value. Held to Maturity assets are reported at amortized cost. By default the product is set to classify all assets as Available For Sale (1).
Sinking Fund Schedule
Every model point in the Sinking Fund product must have a sinking fund schedule defined. This is done in the Sinking Fund Schedule input table. The sinking fund schedule table is indexed by Asset ID and Months Since Issue. The Asset ID corresponds to the model point field by the same name and months since issue is calculated by the product based on the Issue Date on the model point file. For new business model points, the Issue Date will be automatically set to the projection date on which that model point gets purchased by the investment strategy.
The sinking fund schedule table must include a record for every month (starting with 1) up to the maturity date. For a 20 year sinking fund bond, this means there must be 240 lines in the sinking fund schedule table. The Sink Percent column in this table should be set to be the incremental portion of remaining in force that is to be redeemed in the current month.
Example: If you have a Sinking Fund bond with an initial Par Value of $10M with 10% to be redeemed each year for 10 years, then the table would be coded as follows (intermediate months when no sinking fund redemption occurs should be entered as 0 for Sink Percent as shows at time 0 and 1 in the example below).
|Months Since Issue||(a) Par Value Remaining||Sink Fraction||(b) Sink Percent||Redeemed (a) x (b)|
|12||10,000,000||1 / 10||0.1||1,000,000|
|24||9,000,000||1 / 9||0.111111||1,000,000|
|36||8,000,000||1 / 8||0.125||1,000,000|
The market value for the Sinking Fund product uses a separate projected cash flow stream for calculating the market value. This is done in the Market Value Cash Flows Per Bond variable which takes into account the expected future redemptions specified in the Sinking Fund Schedule table.