Fixed rate amortization separately of variable rate

[Former Member]

Hi experts,

I have the issue below and I would like to know if you can help me.

The customer has a product type that have variable rate + fixed rate. The fixed rate is calculated over the base amount + variable interest, but the issue of this product is the fixed rate that has amortization separately of variable rate. To make it work up in CFM (version 5.0) I created 2 transactions:

1.                 1. Interest rate transaction to calculate the variable rate interest;

2.                 2. Facility transaction to calculate the fixed rate interest:

but it didn't work.

There is another solution for this issue?

Thank you and best regards.

Luci Maki

[Former Member]

Hi,

If I understand your question correctly, then you need a variable interest on a nominal amount for a period and then a fixed interest calculated on the nominal + Variable amount for the same period?  As an example, you have a 10M nominal amount on a 3 Month Libor + 5% fixed rate on the 10M + 3month libor interest amt)?

If this is the case, I am afraid multiple parallel interest conditions are not possible in treasury.  For this you would have to use Loans management only where you can have multiple parallel interest conditions.  Even there, to include the interest portion as relevant to capital flow for the calculation of the fixed part is not possible.

As you stated, you can do that by creating a IRI and then creating a swap with floating on one side and floating+fixed on the other side.  However, the nominal amount for this swap as per your case should be the total of initial nominal + the variable interest which again has to be calculated manually and hence your existing solution itself

Also, since you are in CFM 5.0, how did you calculate amortization through money market?

Regards,

Ravi

[Former Member]

Hi Ravi,

sorry for the delay, I was busy with another problem and I could not answer you before.

Actually I decided develop the solution, because I had no time to do new tests, but I think the solution that I had thought could work. 

I would like to thank you for the help,  thank you very much.

Best regards,

Luci

[lisa_savinovich]

Hello Eduardo,

To better understand your quest, I have two questions.  Is it that you are using the SAC gross or net method of amortization and interest is included in the calculation but only the fixed interest?  Is this a money market or security product type? 

Regards,Lisa

[Former Member]

Hi Lisa,

Thank you to answer so fast.

To be clearer, see the explanation below:

I created a transaction including only the variable interest, because the fixed interest has different cash flow dates than variable interest. I think there is no possibility to include both in the same transaction.

The fixed rate is calculated over the base amount + variable interest. To make it work up in CFM (version 5.0) I created 2 transactions:

1. 1. with the variable interest: in this transaction the amount are the nominal amounts and the interest form is variable;
2. 2. with the fixed interest: in this transaction the amount are the nominal amounts +variable interest and the interest form is fixed.

Both are linked by reference.

The issue in this model is that every month the customer will need include manually the interest of variable rate in the fixed interest transaction for the calculation be done correctly and he has a lot of this transaction type.

This product has flow types to include new increases and decreases and I'm using the final amortization repayment form.

My doubt is: there is another way to do this transaction works in CFM without needed to include manually the interest of variable rate in the fixed interest transaction? Or there is another solution for this issue?

Regards,

Luci Maki

[Former Member]

Hi Luci

I believe your statement that the transaction is not recordable in SAP is not correct. I think the flows would fit in a so called Interest Rate Swap fix against floating. In SAP the product type would be 62 A with category 620. There you can enter a fix rate against a floating rate. This transaction is normally used to hedge a bond or a long term credit. Please check this possibility.

Regards

Juerg

[Former Member]

Hi Juerg,

If I use swap transaction I will have the net of fixed rate against floating rate and in my case I have to calculate the fixed rate over the floating rate, do you think is possible to use swap product type anyway?

Regards,

Luci

[Former Member]

Hi dear,

I guess I understood the solution you gave me.

First: I have to create MM transaction with the floating rate;

Second: I have to create a swap transaction: floating rate against floating+fixed rate.

The floating rate will be in MM transaction and the net of swap will be the fixed interest.

Is my argument correct? Was it what you suggested?

Thank you and best regards.

Luci

[Former Member]

Hi there

If you have a fix and a floating rate where the flow generally has to be amortized in this case you have to use the standard product type 62 IRS. If you have a fix interest flow and a floating interest flow and only one of them has to be amortized then you use the standard product type 55 and create to separate transactions. Normally in a business case the amortization is valid for the fix flow interest side and also for the variable interest flow. To amortize only one side is not a real business case and does not make sense.

Regards

Juerg

juerg.heiz@treascon.com

[Former Member]

Hi Juerg,

sorry for the delay, I was busy with another problem and I could not answer you.

Here in Brazil this product type is very common in construction industry.

Actually I decided develop the solution, because I had no time to do new tests, but I think the solution that I had thought could work. 

Thank you!

Best regards,

Luci