Insurance companies were met with a new mandate on their OCI filings this year: the requirement to list the “effective annual interest rate” on fixed income investments that were purchased at a price other than their face value.
In a nutshell, a bond’s effective interest rate takes into account the interest payments that will be received on the bond (stated coupon rate times the bond’s face value) and adjusts for the difference between the face amount of the bond and what was paid to acquire it. For example, if you paid $102 to acquire a $100 bond, you will lose $2 on that bond at maturity because you will only receive $100. Effective interest rate considers this loss of value in addition to the stream of interest payments received to determine the actual earnings the company will receive.
This concept is defined by the investment term “yield to maturity.” Yield to maturity is THE primary consideration when comparing bonds meeting acceptable quality and maturity parameters. The higher the yield to maturity at the time of purchase, the better deal received when buying the bond.
Because this is a new requirement, many companies and their auditors are scrambling to figure out what information was needed and how to obtain it. Fortunately for Financial Fiduciaries clients, we are able to provide the needed information as part of our services to them. Our investment reporting system stores the yield to maturity on all bonds purchased for clients at the time they were purchased. Our clients and their auditors faced with this requirement this year simply had to ask us to prepare a report of yield to maturity at cost and presto! – all the information they needed for this new line on their report was available (It was even available in Excel format if desired by the auditor).
Our goal at Financial Fiduciaries is to take care of our clients’ investment affairs so they can spend their time on other areas of business that require their attention. This is just another example of how having us on the job makes all aspects of handling a company’s investments easier and more efficient for its manager, staff and auditors!