N.Y. Comp. Codes R. & Regs. Tit. 9 §§ 1645-2.3

Current through Register Vol. 46, No. 45, November 2, 2024

Section 1645-2.3 - Book value of investments; amortization of premium or discount

(a) During the period the investment is held by the local agency, the purchase price is periodically adjusted by a straight-line amortization of the premium or discount on acquisition over the remaining life of the investments. The purchase price, as periodically adjusted, is known as the book value of the investment. The premium is defined as the excess of the purchase price over the face value of the securities and the discount as the excess of the face value over the purchase price. The amortized premium is charged through a journal entry to the applicable interest earned account (see § 1645-2.4) and credited directly to the applicable investment account; similarly, the amortized discount is charged to the investment account and credited to the interest earned account. For investments other than U.S. series F, G, J and series K bonds, the entry is made at the end of each calendar quarter, beginning with the quarter the investment was acquired and as of the date of disposition or maturity of the investment. The entries for series F, G, J, and K bonds are made at periodic intervals corresponding with the table of redemption values printed on each bond (see §§ 1645-2.6 and 1645-2.7). The effect of amortizing the premium or discount, it is evident, is to have the book value equal the face value as of the maturity date of the investment and to put the interest earned on a yield basis. Straight-line amortization of premium or discount means that the premium or discount is spread evenly over the period between the date of acquisition and the date of maturity. The computation is made on a daily basis for short-term investments and on a monthly basis for long-term investments. Thus, in the example given in section 1645-2.2, the $692.47 premium paid on U.S. certificates of indebtedness (short-term investment) would be spread over the 360 days from June 6, 1955, the date of acquisition, to June 1, 1956, the date of maturity, and premium for 25 days would be amortized for the balance of the quarter ended June 30, 1955, 92 days for the quarter ended September 30, 1955, etc. As an example of the computation for a long term investment, assume that $10,000 face value of bonds, maturing July 1, 1961, were acquired for $9,700 on April 10, 1956. The $300 discount is spread evenly over the remaining life of the bonds (62 2/3 months) at the rate of $4.79 per month, or $14.37 per quarter. If the investment is disposed of prior to maturity, the book value will reflect the premium or discount amortized to the date of disposition and gain or loss on disposition will be computed accordingly (see § 1645-2.5). The dates of disposition and acquisition are linked to the physical transfer of the securities between buyers and sellers or their agents and will generally differ from the dates the orders to buy or sell are given or the dates on which transfers of the cash occur. Statements rendered by banks or brokers handling investment transactions for local agencies should be carefully examined to determine the date of acquisition or disposition.

(b) The above provisions with respect to amortization of discount shall not apply to the discount on United States Treasury bills. These bills generally mature 90 days after date of issue and are issued at a price below par value (discount) and are redeemed at maturity at face value. Such discount will not be amortized but will be considered as interest earned as of the date of sale or maturity. The interest earned (discount) should not be accrued but should be recorded as of the date of sale or maturity.