8.2.133.2 Module Usage

The Average Life Method determines the Average Life of the instrument by calculating the effective term (expressed in Years) required to repay half of the principal or nominal amount of the instrument. When applied as a Transfer Pricing method, the resulting TP Rate is equivalent to the rate on the associated interest rate curve corresponding to the calculated term. Oracle Funds Transfer Pricing derives the Average Life based on the Cash Flows of an instrument determined by the characteristics specified in the Instrument Table and additionally applying any specified prepayment assumption. The Average Life Formula calculates a single term, which is a point on the yield curve used to Transfer Price the instrument being analyzed.

Figure 8-10 Average Life Formula

Description of _the Average Life Formula follows:

Where:

P is the principal Pi is the principal repayment in coupon i, therefore,

Figure 8-11 Average Life Formula

is the fraction of the principal repaid in coupon i and ti is the time from the start of coupon i.