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Expense Derivation for Ongoing Expense with % DS Basis
By Dean Soukup
Mar 31, 2004, 11:32

When structuring an ongoing expense (such as an LOC or Remarketing fee, under Input >> Expense >> Other Expense) and the expense basis includes 'Percent of Debt Service', the derivation for the expense (under File >> Print >> Expense >> Derivation) will annualize the amount when the applicable timeframe is less than a full fiscal period. This is done to compensate for the rate that is fractionalized based on the same short period.

For example, if there is a short first payment period (i.e. dated and delivered 1/1/2005 and the Fiscal Year ends 7/1/05, or only 6 months), and there is $1,000,000 debt service for that short first period, the derivation for a fee based on 'Percent of Debt Service' will reflect debt service in the amount of $2,000,000 for the same period, or 2 x $1,000,000 to reflect a full 12 month period.

The rate, however, is fractionalized based on the payment period. For example, if the rate for a full period is 1.0%, then the rate for half period is 0.5%. This is because most expense basis methods, such as the days of interest and bond balance, are applied based on the time period. 1% of bond balance for only one month, for example, would be 1/12th of the amount for a full 12 months with the same bond balance.

However, when the ongoing expense basis includes 'Percent of Debt Service,' Munex assumes that the expense should be applied equally to debt service whether the Debt Service reflects a full period or a partial period. But because the rate must be fractionalized to be applied accurately against all expenses basis, then it is the debt service basis itself that must be adjusted to compensate for the fractionalized rate. 

If the expense based on the 'Percent of Debt Service' should in fact be fractionalized, and not based on the full rate, then the fee should be input manually for each period under the rate column on the last screen (Input >> Expense >> Other Expense >> Edit >> Next >> Next >> in the 'Rate' column) as opposed to filling in the default fee under 'Default ongoing payment as percent of basis' column on the previous screen. If entering the rates manually, keep in mind that the Debt Service will still be annualized, so you will need to adjust the rate accordingly. For example a 0.5% fee based off of 6 months instead of a full twelve months would be entered as 0.125% on the respective row, rather than the more intuitive 0.25%.