18 FEBRUARY NEW ZEALAND GAZETTE

The yield to maturity method is used in accordance with the Act and determinations to decide the value of “e”.

(8) Amounts calculated using this determination should be apportioned between income years using Determination G1A: Apportionment of Income and Expenditure on a Daily Basis.

7. Examples—(1) Example A (illustrating Method A)

On 12 February 1991 a company issues notes with a face value of $10,000 for 5 years, at an interest rate of bank bill plus 0.75% pa payable half yearly in arrears. The notes are issued at a discount of 5%. The borrower is a New Zealand company. Contingent fees of 2.5% of $10,000 are payable by the borrower; there are no non-contingent fees.

There is no change in the principal outstanding over the 5 years. The average principal outstanding is therefore $10,000, both overall and within each half year Period.

(a) Before calculating the amount of expenditure deemed to be incurred by the borrower over the term of the arrangement, it is first necessary to determine whether Method A or Method B is to be used. For Method A to be used, the arrangement must satisfy the criteria for a Small Discount or Premium Financial Arrangement (see clause 5 Interpretation).

In this example, the Total Finance Charges Excluding Interest payable by the borrower are calculated as follows:

$ 10,000 principal payable
+ 250 fees paid
– 9,500 principal received
a = 750

Ignoring sign, $750 is less than the amount which determines whether or not Method A can be used, calculated as follows:

2% x the expected term of the financial arrangement calculated in years and fractions of years (5) x the average principal outstanding ($10,000)

2% x 5 x 10,000 = $1,000

So Method A of this determination may be applied.

(b) The expenditure deemed to be incurred by the borrower in a specific Period is calculated using the formula

x + y

(i) “x” is the amount of Total Finance Charges Excluding Interest allocated to that Period. Using Method A

x = a x b x c
    d

where

a = the Total Finance Charges Excluding Interest payable by the issuer or receivable by the holder as the case may be;

b = the length of the Period
= 1 throughout the time of the financial arrangement, as all of the Periods are the same length (half a year)

c = the amount of principal outstanding during the Period;
= $10,000 in all Periods.

d = the sum of all items (b x c) calculated in respect of every Period
= 1 x $10,000 x 10 (as there are 10 half year Periods);
= $100,000.

Therefore, x = 750 x 1 x 10,000
100,000

    = $75 for each half year Period.

(ii) y is the amount of Interest payable or receivable in the Period.

Therefore, in this example,

y = Interest calculated at the bank bill rate plus 0.75%.

(iii) Therefore, the expenditure incurred by the borrower in each half year would be:

x + y
($75 + Interest calculated at the bank bill rate plus 0.75%)

This expenditure would be spread using Determination G1A: Apportionment of Income and Expenditure on a Daily Basis.

If the fees were payable to a holder who was a New Zealand taxpayer (but not a cash basis holder), this taxpayer would be deemed to have derived similar amounts of income.

(2) Example B (a further illustration of Method A)

On 12 February 1991 a company issues notes with a face value of $10,000 for five years at an interest rate of bank bill plus 0.75% pa payable half yearly in arrears. The notes are issued at a discount of 4.5%. The borrower is a New Zealand company.

$2,000 of the face value of the notes is to be repaid on each anniversary of the issue. There are no fees.

The length of each Period is measured in half years, so b = 1 throughout.

The average principal outstanding over the five years is:

(10,000 + 8,000 + 6,000 + 4,000 + 2,000) ÷ 5 = $6,000

(a) Decide whether Method A can be applied.

The Total Finance Charges Excluding Interest payable by the borrower are equal to:

$ 10,000 principal payable
+ 0 fees paid
– 9,550 principal received (after discount)
a = 450

Ignoring sign, this is less than:

2% x 5 (years) x 6,000 (average principal outstanding) = $600

So Method A of this determination may be applied.

(b) Calculate the value of x

The following table sets out the allocation of the Total Finance Charges Excluding Interest:

(i) y = Interest on the principal outstanding in the half year at the bank bill rate plus 0.75% pa.

(ii) The expenditure incurred by the borrower in each half year Period would be:

x (calculated in accordance with the above table) + y

This expenditure would be spread using Determination G1A: Apportionment of Income and Expenditure on a Daily Basis.

If the fees were payable to a holder who was a New Zealand taxpayer (but not a cash basis holder), this taxpayer would be deemed to have derived similar amounts of income.

(3) Example C (another illustration of Method A)

This is similar to Example B, but issued at a premium, and seen from the holder’s viewpoint. It is somewhat artificial, in order to illustrate a point.