Notional amount

Spread
Expected spread

1,000,000.00
3.00%
1.42%

Original forward periods

Remaining periods
Spot (zero) and forward rates
Reflecting benchmark interest
Spot rates (BM)
Forward rates (BM)

Simple scenario assuming the foward

rates from t3 have become actual rates
in t4 [ie 'moving along the forward
curve'].

5
1

4.18%
4.18%

Reflecting contractual interest

Spot rates (contractual)
Forward rates (contractual)

7.18%
7.18%

Reflecting expected interest

Spot rates (BM+expected spread)
Forward rates (BM+expected spread)

5.60%
5.60%

Contractual cash flows

Cash flows:
Variable interest
Principal

71,816.16
1,000,000.00

Present value:
Variable interest
Principal

67,004.17
932,995.83

Expected cash flows

Credit loss (%)
Expected cash flows (% received)
Cash flows:
Variable interest
Principal

35,908.08
500,000.00

PV (using initial expected spread)

Variable interest
Principal

34,003.43
473,478.80

Accounting
Expected EIR (%)
Interest revenue
CF differential (i CF vs i accrual)
Carrying amount
1,000,000.00
Yield (%)

67,004.17
932,995.83
1,000,000.00

50.00%
50.00%

In the simple scenario in which the the

foward rates from t3 have become actual
rates in t4 the carrying amount unwinds to
the expected principal CF at maturity if
there is no (further) change in expected

528,949.46

470,316.18

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office

485,334.05

507,482.22

5.60%
28,425.86
-7,482.22
500,000.00
5.60%

34,003.43
473,478.80
507,482.22
0.00

0.00

FRN t4

Notional amount
Spread
Expected spread

1,000,000.00
3.00%
1.42%

Original forward periods

Remaining periods
Spot (zero) and forward rates
Reflecting benchmark interest
Spot rates (BM)
Forward rates (BM)

The expected spread is reset in t3 in order to

recalibrate the PV to the carrying amount.

The benchmark interest curves

changed from t2 to t3. This means
that the carrying amount will no
longer (automatically) unwind to the
expected principal CF at maturity.

Reflecting contractual interest

Spot rates (contractual)
Forward rates (contractual)
Reflecting expected interest
Spot rates (BM+expected spread)
Forward rates (BM+expected spread)

New spot curve derived

using the revised expected
spread (after reset of the
expected EIR).

Contractual cash flows

Cash flows:
Variable interest
Principal
Present value:
Variable interest
Principal
Expected cash flows
Credit loss (%)
Expected cash flows (% received)
Cash flows:
Variable interest
Principal
PV (using initial expected spread)
Variable interest
Principal

Accounting
Variable expected EIR (%)
Interest revenue
CF differential (i CF vs i accrual)
Carrying amount
1,000,000.00
Catch-up adjustment
Carrying amount before re-estimate
Yield (%)

No catch-up adjustment as
calibration is effected by adjusting
the initial expected spread (ie
resetting the expected EIR).

528,949.46

470,316.18

For comparison: BM forward rate + initial expected spread

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office

485,334.05
0.00
485,334.05

4
1

5
2

4.74%
4.74%

4.46%
4.18%

7.74%
7.74%

7.46%
7.18%

6.16%
6.16%

5.88%
5.60%

77,381.55

71,816.16
1,000,000.00

71,823.72

62,191.69
865,984.60

90.00%
10.00%

50.00%
50.00%

7,738.15

35,908.08
500,000.00

7,289.29

32,030.99
446,013.76

6.16%
29,886.33
22,148.18
507,482.22

5.60%
28,425.86
-7,482.22
500,000.00

6.16%

5.60%

5.27%

4.72%

134,015.40
865,984.60
1,000,000.00

39,320.28
446,013.76
485,334.05
0.00
Adjusting the initial expected
spread ensures the PV equals
the carrying amount.

0.00
Adjusting the initial expected
spread also ensures correct
unwinding.
Interest accrues at a higher rate than
the BM forward rate + initial expected
spread despite higher than expected
credit losses because the initial spread
has been reset.

FRN t3

Notional amount
Spread
Expected spread

1,000,000.00
3.00%
0.36%

Original forward periods

Remaining periods

4
1

5
2

4.74%
4.74%

4.46%
4.18%

Reflecting contractual interest

Spot rates (contractual)
Forward rates (contractual)

7.74%
7.74%

7.46%
7.18%

Reflecting expected interest

Spot rates (BM+expected spread)
Forward rates (BM+expected spread)

5.10%
5.10%

4.82%
4.55%

77,381.55

71,816.16
1,000,000.00

71,823.72

62,191.69
865,984.60

90.00%
10.00%

50.00%
50.00%

7,738.15

35,908.08
500,000.00

7,362.54

32,679.76
455,047.53

5.10%
24,760.03
17,021.88
502,355.93
5.10%

4.55%
22,832.62
-13,075.45
489,280.47
4.55%

Spot (zero) and forward rates

Reflecting benchmark interest
Spot rates (BM)
Forward rates (BM)

The benchmark interest curves

changed from t2 to t3. This means
that the carrying amount will no
longer (automatically) unwind to the
expected principal CF at maturity.

Contractual cash flows

Cash flows:
Variable interest
Principal
Present value:
Variable interest
Principal
Expected cash flows
Credit loss (%)
Expected cash flows (% received)
Cash flows:
Variable interest
Principal
PV (using initial expected spread)
Variable interest
Principal

Accounting
Expected EIR (%)
Interest revenue
CF differential (i CF vs i accrual)
Carrying amount
1,000,000.00
Yield (%)

528,949.46

470,316.18

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office

485,334.05

134,015.40
865,984.60
1,000,000.00

40,042.31
455,047.53
495,089.84
-9,755.79
Difference arising after
change in forward curve.

-10,719.53
Difference arising after
change in forward curve.

FRN t3 (pre reset)

Notional amount
Spread
Expected spread

1,000,000.00
3.00%
0.36%

Original forward periods

Remaining periods
Spot (zero) and forward rates
Reflecting benchmark interest
Spot rates (BM)
Forward rates (BM)

The expected spread is reset in t2 in order to

recalibrate the PV to the carrying amount.

The benchmark interest curves

changed from t1 to t2. This means
that the carrying amount will no
longer (automatically) unwind to the
expected principal CF at maturity.

Reflecting contractual interest

Spot rates (contractual)
Forward rates (contractual)
Reflecting expected interest
Spot rates (BM+expected spread)
Forward rates (BM+expected spread)

New spot curve derived

using the revised expected
spread (after reset of the
expected EIR).

Contractual cash flows

Cash flows:
Variable interest
Principal
Present value:
Variable interest
Principal
Expected cash flows
Credit loss (%)
Expected cash flows (% received)
Cash flows:
Variable interest
Principal
PV (using initial expected spread)
Variable interest
Principal

Accounting
Variable expected EIR (%)
Interest revenue
CF differential (i CF vs i accrual)
Carrying amount
1,000,000.00
Catch-up adjustment
Carrying amount before re-estimate
Yield (%)

No catch-up adjustment as
calibration is effected by adjusting
the initial expected spread (ie
resetting the expected EIR).

528,949.46

470,316.18
0.00
470,316.18

For comparison: BM forward rate + initial expected spread

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office

3
1

4
2

5
3

7.14%
7.14%

7.22%
7.30%

7.30%
7.47%

10.14%
10.14%

10.22%
10.30%

10.30%
10.47%

7.51%
7.51%

7.58%
7.66%

7.67%
7.83%

101,428.57

102,992.70

104,710.50
1,000,000.00

92,088.20

84,776.89

78,021.22
745,113.69

80.00%
20.00%

90.00%
10.00%

50.00%
50.00%

20,285.71

10,299.27

52,355.25
500,000.00

18,869.32

8,898.30

41,947.17
400,601.40

7.51%
35,303.58
15,017.87
485,334.05

7.66%
37,190.00
26,890.73
512,224.78

7.83%
40,130.47
-12,224.78
500,000.00

7.51%

7.66%

7.83%

7.68%

7.84%

8.01%

254,886.31
745,113.69
1,000,000.00

69,714.78
400,601.40
470,316.18
0.00
Adjusting the initial expected
spread ensures the PV equals
the carrying amount.

0.00
Adjusting the initial expected
spread also ensures correct
unwinding.
Interest accrues at a lower rate than the BM
forward rate + initial expected spread because
the initial spread has been reset (the spread
can even become negative when using this
approach)

FRN t2

Notional amount
Spread
Expected spread

1,000,000.00
3.00%
0.54%

Original forward periods

Remaining periods
Spot (zero) and forward rates
Reflecting benchmark interest
Spot rates (BM)
Forward rates (BM)

The benchmark interest curves

changed from t1 to t2. This means
that the carrying amount will no
longer (automatically) unwind to the
expected principal CF at maturity.

Reflecting contractual interest

Spot rates (contractual)
Forward rates (contractual)
Reflecting expected interest
Spot rates (BM+expected spread)
Forward rates (BM+expected spread)
Contractual cash flows
Cash flows:
Variable interest
Principal
Present value:
Variable interest
Principal
Expected cash flows
Credit loss (%)
Expected cash flows (% received)
Cash flows:
Variable interest
Principal
PV (using initial expected spread)
Present value:
Variable interest

Accounting
Expected EIR (%)
Interest revenue
CF differential (i CF vs i accrual)
Carrying amount
1,000,000.00
Yield (%)

528,949.46

470,316.18

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office

3
1

4
2

5
3

7.14%
7.14%

7.22%
7.30%

7.30%
7.47%

10.14%
10.14%

10.22%
10.30%

10.30%
10.47%

7.68%
7.68%

7.76%
7.84%

7.84%
8.01%

101,428.57

102,992.70

104,710.50
1,000,000.00

92,088.20

84,776.89

78,021.22
745,113.69

80.00%
20.00%

90.00%
10.00%

50.00%
50.00%

20,285.71

10,299.27

52,355.25
500,000.00

18,839.13

8,869.87

41,746.47
398,684.67

7.68%
36,113.78
15,828.06
486,144.24
7.68%

7.84%
38,089.55
27,790.28
513,934.52
7.84%

8.01%
41,149.76
-11,205.49
502,729.03
8.01%

254,886.31
745,113.69
1,000,000.00

69,455.47
398,684.67
468,140.14
2,176.04
Difference arising after
change in forward
curve.

2,729.03
Difference arising after
change in forward curve.

FRN t2 (pre reset)

Notional amount
Spread
Expected spread

1,000,000.00
3.00%
0.54%

Initial expected
spread determined in
t0.

Original forward periods

Remaining periods

2
1

3
2

4
3

5
4

6.68%
6.68%

6.74%
6.79%

6.80%
6.92%

6.86%
7.05%

Reflecting contractualcurve'].
interest
Spot rates (contractual)
Forward rates (contractual)

9.68%
9.68%

9.74%
9.79%

9.80%
9.92%

9.86%
10.05%

Reflecting expected interest

Spot rates (BM+expected spread)
Forward rates (BM+expected spread)

7.22%
7.22%

7.27%
7.33%

7.33%
7.45%

7.40%
7.59%

96,802.13

97,943.73

99,185.17

100,538.47
1,000,000.00

88,258.52

81,333.28

74,932.03

69,015.68
686,460.48

0.00%
100.00%

80.00%
20.00%

90.00%
10.00%

50.00%
50.00%

96,802.13

19,588.75

9,918.52

50,269.23
500,000.00

90,287.04

17,022.58

8,021.25

37,785.67
375,832.92

Spot (zero) and forward rates

Reflecting benchmark interest
Spot rates (BM)
Simple scenario assuming the foward
Forward rates (BM) rates from t0 have become actual rates
in t1 [ie 'moving along the forward

Contractual cash flows

Cash flows:
Variable interest
Principal
Present value:
Variable interest
Principal
Expected cash flows
Credit loss (%)
Expected cash flows (% received)
Cash flows:
Variable interest
Principal
PV (using initial expected spread)
Variable interest
Principal

Accounting
Carrying amount after
Expected EIR (%)
impairment loss (write-down)
Interest revenue
CF differential (i CF vs i accrual)
Carrying amount
1,000,000.00
528,949.46
Impairment loss
-446,408.13
Carrying amount before re-estimate
975,357.60
Yield (%)

Impairment loss is calculated using

the initial expected spread and the
current forward curve.

7.22%
38,168.85
-58,633.28
470,316.18

7.33%
34,474.80
14,886.05
485,202.24

7.45%
36,168.32
26,249.80
511,452.04

7.59%
38,817.20
-11,452.04
500,000.00

7.22%

7.33%

7.45%

7.59%

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office

313,539.52
686,460.48
1,000,000.00

Revised loss estimate in t1.

153,116.54
375,832.92
528,949.46
446,408.13

0.00

FRN t1 revised ECF

Notional amount
Spread
Expected spread

1,000,000.00
3.00%
0.54%

Initial expected spread

determined in t0.

Original forward periods

Remaining periods

2
1

3
2

4
3

5
4

Spot (zero) and forward rates

Reflecting benchmark interest
Simple scenario assuming the foward
Spot rates (BM)
rates from t0 have become actual rates
Forward rates (BM)

6.68%
6.68%

6.74%
6.79%

6.80%
6.92%

6.86%
7.05%

Reflecting contractual interest

Spot rates (contractual)
Forward rates (contractual)

9.68%
9.68%

9.74%
9.79%

9.80%
9.92%

9.86%
10.05%

Reflecting expected interest

Spot rates (BM+expected spread)
Forward rates (BM+expected spread)

7.22%
7.22%

7.27%
7.33%

7.33%
7.45%

7.40%
7.59%

96,802.13

97,943.73

99,185.17

100,538.47
1,000,000.00

88,258.52

81,333.28

74,932.03

69,015.68
686,460.48

0.00%
100.00%

40.00%
60.00%

40.00%
60.00%

5.00%
95.00%

96,802.13

58,766.24

59,511.10

95,511.54
950,000.00

90,287.04

51,067.75

48,127.48

71,792.76
714,082.55

7.22%
70,381.54
-26,420.59
948,937.00
7.22%

7.33%
69,558.34
10,792.10
959,729.11
7.33%

7.45%
71,540.87
12,029.76
971,758.87
7.45%

7.59%
73,752.67
-21,758.87
950,000.00
7.59%

in t1 [ie 'moving along the forward

curve'].

Contractual cash flows

Cash flows:
Variable interest
Principal
Present value:
Variable interest
Principal
Expected cash flows
Credit loss (%)
Expected cash flows (% received)
Cash flows:
Variable interest
Principal
PV (using initial expected spread)
Variable interest
Principal

Accounting
Expected EIR (%)
Interest revenue
CF differential (i CF vs i accrual)
Carrying amount
1,000,000.00
Yield (%)

975,357.60

313,539.52
686,460.48
1,000,000.00

261,275.04
714,082.55
975,357.60
0.00

0.00

In the simple scenario in which the the

foward rates from t0 have become actual
rates in t1 the carrying amount unwinds to
the expected principal CF at maturity if
there is no change in expected credit losses.

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office

FRN t1 (before re-estimate)

Notional amt
Spread

1,000,000.00
3.00%

Original forward periods

Remaining periods

Spread adjustment
Expected spread

-2.46%
0.54%

Based on contractual EIR vs

expected EIR (ie loss adjusted)
[see lines 50-53].

1
1

2
2

3
3

4
4

Spot (zero) and forward rates

Reflecting benchmark interest
Spot rates (BM)
Forward rates (BM)

5.00%
5.00%

5.84%
6.68%

6.16%
6.79%

6.35%
6.92%

6.49%
7.05%

Reflecting contractual interest

Spot rates (contractual)
Forward rates (contractual)

8.00%
8.00%

8.84%
9.68%

9.16%
9.79%

9.35%
9.92%

9.49%
10.05%

6.69%
7.33%

6.88%
7.45%

7.02%
7.59%

Reflecting expected interest

Spot rates (BM+expected spread)
Forward rates (BM+expected spread)

This tab illustrates a possible approximation

that would not involve the calculation of
5.54%
6.37%
forward and spot
curves specifically
for the
expected spread
(ie the grey shaded
cells
5.54%
7.22%
would be obsolete).

Contractual cash flows

Cash flows:
Variable interest
Principal
Present value:
Variable interest
Principal
Expected cash flows
Credit loss (%)
Expected cash flows (% received)
Cash flows:
Variable interest
Principal
PV (using initial expected spread)
Variable interest
Principal

Accounting
Expected EIR (%)
Interest revenue
CF differential (i CF vs i accrual)
Carrying amount
1,000,000.00
Yield (%)

IRR
Contractual
Expected
Spread adjustment

-1,000,000.00
-1,000,000.00

5
Approximation of5 expected
spread (derived as contractual
spread less spread adjustment).

80,000.00

96,802.13

97,943.73

99,185.17

100,538.47
1,000,000.00

74,074.07

81,720.85

75,308.59

69,381.51

63,903.41
635,611.56

0.00%
100.00%

0.00%
100.00%

40.00%
60.00%

40.00%
60.00%

5.00%
95.00%

80,000.00

96,802.13

58,766.24

59,511.10

95,511.54
950,000.00

75,797.52

85,537.34

48,377.38

45,588.36

67,999.68
676,354.87

5.54%
55,443.57
-24,556.43
975,443.57
5.54%

7.22%
70,471.61
-26,330.53
949,113.05
7.22%

7.34%
69,652.85
10,886.61
959,999.65
7.34%

7.46%
71,643.57
12,132.47
972,132.12
7.46%

7.60%
73,864.58
-21,646.96
950,485.16
7.60%

80,000.00
80,000.00

96,802.13
96,802.13

97,943.73
58,766.24

An alternative way of determining the

expected spread is comparing the internal
rates of return on a contractual vs an
expected basis. That difference is then
deducted from the contractual spread.

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office

99,185.17 1,100,538.47
59,511.10 1,045,511.54

364,388.44
635,611.56
1,000,000.00

323,300.28
676,354.87
999,655.15
344.85
Difference due to
approximation.

485.16
Difference due to
approximation.

9.41%
6.95%
-2.46%

FRN t0 (approximation)

Notional amt
Spread
Expected spread

1,000,000.00
3.00%
0.54%

Original forward periods

Remaining periods

Determined by iteration (setting the

initial PV of the expected CFs equal
to the initial carrying amount).

1
1

2
2

3
3

4
4

5
5

Spot (zero) and forward rates

Reflecting benchmark interest
Spot rates (BM)
Forward rates (BM)

5.00%
5.00%

5.84%
6.68%

6.16%
6.79%

6.35%
6.92%

6.49%
7.05%

Reflecting contractual interest

Spot rates (contractual)
Forward rates (contractual)

8.00%
8.00%

8.84%
9.68%

9.16%
9.79%

9.35%
9.92%

9.49%
10.05%

Reflecting expected interest

Spot rates (BM+expected spread)
Forward rates (BM+expected spread)

5.54%
5.54%

6.37%
7.22%

6.69%
7.33%

6.88%
7.45%

7.02%
7.59%

80,000.00

96,802.13

97,943.73

99,185.17

100,538.47
1,000,000.00

74,074.07

81,720.85

75,308.59

69,381.51

63,903.41
635,611.56

0.00%
100.00%

0.00%
100.00%

40.00%
60.00%

40.00%
60.00%

5.00%
95.00%

80,000.00

96,802.13

58,766.24

59,511.10

95,511.54
950,000.00

75,803.69

85,551.14

48,389.05

45,603.01

68,026.96
676,626.15

5.54%
55,357.60
-24,642.40
975,357.60
5.54%

7.22%
70,381.54
-26,420.59
948,937.00
7.22%

7.33%
69,558.34
10,792.10
959,729.11
7.33%

7.45%
71,540.87
12,029.76
971,758.87
7.45%

7.59%
73,752.67
-21,758.87
950,000.00
7.59%

Contractual cash flows

Cash flows:
Variable interest
Principal
Present value:
Variable interest
Principal
Expected cash flows
Credit loss (%)
Expected cash flows (% received)
Cash flows:
Variable interest
Principal
PV (using initial expected spread)
Variable interest
Principal

Accounting
Expected EIR (%)
Interest revenue
CF differential (i CF vs i accrual)
Carrying amount
1,000,000.00
Yield (%)

\\vboxsrv\conversion_tmp\scratch_4\231741811.xls.ms_office

364,388.44
635,611.56
1,000,000.00

323,373.85
676,626.15
1,000,000.00
Calibrated to 1m using
iteration for the
expected spread.

Carrying amount unwinds

to the expected CF on
maturity.

FRN t0