This document describes how CS Lucas system handles stub period for interest computation.
WHY IS THIS IMPORTANT?
This allows users to verify the formula and methodology used by CS Lucas to compute the interest for stub period.
When a term loan is created with first coupon date which is less than the standard cycle, the system will generate a shorter first period, known as stub period.
The system has a special handling in the case where accrual method is 30/360 and frequency is Annual, Semi-Annual, Quarterly or Monthly.
Create a term loan transaction as follows:
The system generates the below periodic structure
The stub period starts on 2 Feb 2017 and ends on 2 Jul 2017. This is 150 days, which is shorter than the regular semi-annual frequency.
The interest computation for the interest in the stub period is as follows:
1) The system will compute a “notional” start date for the stub period based on the end date 2 Feb 2017 and semi-annual frequency. In this example, the notional start date is 2 Jan 2017.
2) Compute the number of days is this period using notional start date:
2 Jan 2017 to 2 Jul 2017 is 181 days
3) As this is a semi-annual frequency, the implied period interest based on the notional start date is:
5% * 1,000,000/2 = 50,000
4) Apportion the implied period interest to the effective days:
50,000 * 150/181 = 20,718.23