New Zealand Gazette – 2004 – No. 68

Page 1609

✨ Financial Arrangements Examples



10 JUNE 2004

NEW ZEALAND GAZETTE, No. 68

1609

Schedule: Further examples

Note: In each example involving a base price adjustment, the base price adjustment is calculated on the assumption that the financial arrangement is subject to Division 2 of Part EH of the Act. The details of the calculation would differ for a financial arrangement that was subject to Division 1 of Part EH of the Act.

Example A: Discounted bond
A NZ investor holds a United States Treasury Bond on its balance date of 30 June 2005. The bond has a term of 5 years and bears 10% interest payable semi-annually on 1 September and 1 March. It has a face value of USD $10,000,000. The bond was purchased at issue for USD $8,300,000.00 and matures on 1 September 2009.

The following table presents the spot rates at the relevant dates and the forward rates at the time of contract out to the relevant dates. The forward rates were estimated based on the principle of covered interest parity using the interest rates in the US (US,I), the domestic interest rates (NZ,I) and the spot rate at the time of contract. In this simple example, the (US,I) and the (NZ,I) were assumed to be 10% per annum and 8% per annum, respectively, and they remain constant throughout the entire period (assuming a horizontal yield curve so that a 6-month bond and a 5-year bond have the same rate).

Date Spot Fwd (0,t) US,I NZ,I
1-Sep-04 0.6310 0.6310 0.05 0.04
1-Mar-05 0.6455 0.6371 0.05 0.04
1-Sep-05 0.6500 0.6432 0.05 0.04
1-Mar-06 0.6550 0.6494 0.05 0.04
1-Sep-06 0.6570 0.6556 0.05 0.04
1-Mar-07 0.6580 0.6619 0.05 0.04
1-Sep-07 0.6400 0.6683 0.05 0.04
1-Mar-08 0.6380 0.6747 0.05 0.04
1-Sep-08 0.6150 0.6812 0.05 0.04
1-Mar-09 0.6150 0.6878 0.05 0.04
1-Sep-09 0.6150 0.6944 0.05 0.04

At the time of contract – 1 September 2004
Given the above assumptions, the payments in USD expected at the time of contract (see column (a)) could be converted to NZD based on the forward rates at each relevant date (see column (b)). The expected NZD net amount represents a yield of approximately 12% per annum over the 5-year period and the yield is spread in a way consistent with Determination G3. The value of NZD $848,432, for instance, is the expected component of the gross income for the NZ investor for the 6-month period ending 1 March 2005.

Date (a) USD Cash (b) Expected Cash (NZD) (c) Expected Income
1-Sep-04 -8,300,000 -13,153,724
1-Mar-05 500,000 784,846 848,432
1-Sep-05 500,000 777,372 852,533
1-Mar-06 500,000 769,968 857,381
1-Sep-06 500,000 762,635 863,020
1-Mar-07 500,000 755,372 869,494
1-Sep-07 500,000 748,178 876,855
1-Mar-08 500,000 741,052 885,155
1-Sep-08 500,000 733,995 894,450
1-Mar-09 500,000 727,004 904,800
1-Sep-09 10,500,000 15,121,690 916,268
6-Month YTM 7% 6%
Total 6,700,000 8,768,389 8,768,389

When cash is subsequently received at the relevant dates, the NZD values of the payments are likely to differ from those expected at the contract date. Where the NZD values of these subsequent payments deviate from the expected NZD values, they give rise to an unexpected component of the gross income or expenditure. For example, on 1 March 2005 the actual payment was NZD $774,593 while the expected payment was NZD $784,846. The discrepancy of NZD $10,253 is the unexpected component for the period ending 30 June 2005.

Date Expected Cash (NZD) Actual Cash (NZD) Unexpected Income/Expenditure
1-Sep-04 -13,153,724 -13,153,724
1-Mar-05 784,846 774,593 -10,253
1-Sep-05 777,372 769,231 -8,141
1-Mar-06 769,968 763,359 -6,609
1-Sep-06 762,635 761,035 -1,600
1-Mar-07 755,372 759,878 4,506
1-Sep-07 748,178 781,250 33,072
1-Mar-08 741,052 783,699 42,647


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Online Sources for this page:

VUW Te Waharoa — PDF NZ Gazette 2004, No 68


Gazette.govt.nz — PDF NZ Gazette 2004, No 68




✨ LLM interpretation of page content

💰 Further examples of financial arrangements denominated in foreign currency (continued from previous page)

💰 Finance & Revenue
Financial Arrangements, Foreign Currency, Discounted Bond, Spot Rates, Forward Rates, Expected Income, Unexpected Income