Prepayment Event Steps

Update the Value of Prepayment Dimensions

Depending on the prepayment assumptions for the product leaf, values for the prepayment dimensions may need to be updated. The prepayment assumptions for the product leaf are defined in a Prepayment Rule, which is then selected for the current processing run.

If the prepayment method is Constant Rate “Use Payment Dates”, these updates are not necessary. If the prepayment method is Arctangent, only the rate ratio is necessary to calculate. For the Prepayment Model method, the required updates depend on the dimension within the table for the proper origination date range.

Following are the all possible prepayment dimensions and their calculations:

Market Rate: The market rate is selected per product within the Prepayment Rule. You must select an IRC from the list of IRCs defined in Rate Management > Interest Rates. The chosen IRC provides the base value for the market rate. Additionally, you must specify the reference term you want to use for IRCs that are yield curves. There are three possible methods for you to select:
Original Term: The calculation retrieves the forecasted rate from the term point equaling the original term on the instrument.
Reprice Frequency: The calculation retrieves the forecasted rate from the term point equaling the repricing frequency of the instrument. If the instrument is fixed rate and, therefore, does not have a reprice frequency, the calculation retrieves the forecasted rate associated with the term point equaling the original term on the instrument.
Remaining Term: The calculation retrieves the forecasted rate from the term point equaling the remaining term of the instrument. See the description of the remaining term calculation listed in the following for more details. The market rate is determined by retrieving the proper forecasted rate and adding the user-input spread.
Market Rate = f(Current Date, IRC, yield curve term) + spread
Coupon Rate: The coupon rate is the current rate of the instrument record (as of the current date in the forecast).
Rate Difference: The rate difference is the spread between the coupon rate and the market rate. Before calculating this dimension, the market rate must be retrieved.
Rate Difference = Coupon Rate - Market Rate
Rate Ratio: The rate ratio is the proportional difference between the coupon rate and the market rate. Before calculating this dimension, the market rate must be retrieved.
Rate Ratio = Coupon Rate / Market Rate
Original Term: The original term is retrieved from the original term of the instrument. If the original term is expressed in months, no translation is necessary. Otherwise, the following calculations are applied:
Original Termmonths = ROUND((Original Termdays)/30.412) Original Termmonths = Original Termyears*12
Reprice Frequency: The value for reprice frequency depends on the adjustable type code and the tease characteristics of the instrument data.
Fixed-Rate: If the instrument is a fixed rate, as designated by an adjustable type code = fixed (code value = 0), the original term, as defined earlier, is used as the repricing frequency.
Reprice Frequency = Original Term (months)
Non-Tease Floating: If the adjustable type of the instrument is floating (code value of 30 or 50 and not in a tease period), the repricing frequency is assumed to be one day, which when rounded to month value, becomes 0 months.
Reprice Frequency = 0 months
Non-Tease Adjustable: If the adjustable type of the instrument is adjustable (code value of 250) and not in a tease period, the repricing frequency columns are used. All cases where terms are not expressed in months should be translated into months, calculated as follows: Reprice Frequencymonths = Reprice Frequencyyears * 12 Reprice Frequencymonths = Round(Reprice Frequencydays / 30.412)
Teased Loans: The tease period is identified by a tease end date > current date. The reprice frequency during the tease period is calculated as follows, rounded to the nearest whole number of months.
Reprice Frequency = ROUND((Tease End Date - Origination Date) /30.412)
Remaining Term: The remaining term value represents the remaining number of months until maturity. The value is rounded to the nearest whole number of months.
Remaining Term = ROUND((Maturity Date - Current Date)/30.412)
Expired Term (Age): The expired term represents the age of the instrument. It represents the time elapsed since the origination of the instrument. The value is rounded to the nearest whole number of months.
Expired Term = ROUND((Current Date - Origination Date)/30.412)
Term to Reprice: As with reprice frequency, the calculation of term to reprice depends on the adjustable type code and tease characteristics of the instrument characteristics.
Fixed-Rate: If the instrument is a fixed rate, as designated by an adjustable type code = fixed (code value = 0), the term to reprice is calculated in the same manner as the remaining term. The value is rounded to the nearest whole number of months.
Term to Reprice = Round (Maturity Date - Current Date/30.412)
Non-Tease Floating: If the adjustable type of the instrument is floating (code value of 30 or 50), and is not in its tease period, the reprice frequency is taken as 1 day. The term to reprice is assumed to be one day, which when rounded to month value, becomes 0 months.
Term to Reprice = 0 months
Non-Tease Adjustable: If the adjustable type of the instrument is adjustable (code value of 250) and not in its tease period, the term to reprice is calculated as the difference between the current date and the next reprice date. The value is rounded to the nearest whole number of months.
Term to Reprice = ROUND((Maturity Date - Current Date)/30.412)
Teased Loans: The tease period is identified by a tease end date > current date. The term to reprice, while in this period, is calculated as the difference between the current date and the tease end date. The value is rounded to the nearest whole number of months.
Term to Reprice = ROUND((Tease End Date - Current Date)/30.412)

Determine Base Annual Prepayment Rate

The method for determining the annual prepayment rate depends on the prepayment method.

Constant Rate: Constant prepayment rates can vary for different origination date ranges. The rate is determined by finding the proper range of origination dates and using the constant rate from this range. Base Annual PP Rate = Constant Rate
Arctangent: The arctangent formula describes the relationship between prepayments and the ratio of coupon rate to market rate. Four coefficients you enter define the shape of the curve. These coefficients can vary by origination date range. Base Annual PP Rate = Coeff1-Coeff2 * ARCTANGENT(Coeff3* (Coeff4-Rate Ratio))
Prepayment Model: Under the Prepayment Model method, a Prepayment Model rule is referenced within the Prepayment Rule for a particular product and origination date range. This prepayment model may be factored by a coefficient to scale the prepayment rates that reside in the table up or down. The prepayment model factor is also defined per product and origination date. The Prepayment Model rule contains a table of prepayment rates dimensioned by other characteristics, as listed in Step 1, earlier. The Prepayment Model rule can hold a maximum of three dimensions. For each dimension, you can define the lookup method along that dimension, either range or interpolate.
Range Lookup: Range Lookups treats the nodes within the dimension as a starting value for a range that extends to the next node dimension. For example, take an original term dimension with node values of 0,12, and 24. The range lookup treats these values as three sets of ranges: 0 to 11, 12 to 23, and >= 24.
Interpolation Lookup: If the interpolation method is selected, the lookup applies straight-line interpolation to determine the proper prepayment rate for values that fall between nodes.
Lookups Outside the Given Range: For both lookup methods, lookup for values less than the lowest node value receives the prepayment rate associated with the lowest node. Values greater than the highest node receive the prepayment rate associated with the highest node.
Along each dimension of the table, range lookup or interpolation is performed to pinpoint the proper prepayment rate from the table. Once the prepayment rate is retrieved from the prepayment table, the prepayment table factor is applied to this rate.

Base Annual PP Rate = PPModelFactor * PPTModelLOOKUP(dimensionx, dimensiony, dimensionz)

Adjust for Seasonality

For each prepayment method, seasonality factors can be applied to adjust the prepayment rate. The seasonality factors are defined per month. The month of the current date is used to determine the proper seasonality factor to use. Annual PP Rate = Seasonality Factor(Current Month) * Base Annual PP Rate

Check Prepayment in Full Option

If the adjusted final prepayment rate is equal to 100%, the instrument is paid off in full.

De-annualize the Prepayment Option

The annual prepayment rate is adjusted to a rate per payment. The formula is as follows:

Prepayment Factor = (1-(1- Annual PPRate)^(1/payments per year)

Adjust Prepayment Rate for Stub or Extended Payments and/or Payment Dates impacted by Holiday Adjustment

The prepayment rate per payment is adjusted if the payment is a:

Stub or extended payment.
Payment dates impacted by Holiday adjustment (when Holiday calculation method is Recalculate Payment).

This adjustment is made in the same manner that interest cash flows are adjusted, as follows:

Adjusted prepayment factor = Prepayment Factor * (next payment date - last payment date) / (next payment date – calculated last payment date).

Where Calculated Last Payment Date is the Next Payment Date rolled back by the number of months in PMT_ FREQ.

Determine the Prepayment Amount

The amount of runoff due to prepayments is calculated. The prepayment factor is applied to the current balance.

Prepayment Runoff = Current Balance * prepayment factor

Update the Current Balance

The current balance must be reduced by the amount of prepayment runoff.

Current Balance = Current Balance - Prepayment runoff

Apply Prepayment Factor to the Current Payment

An option exists in the Prepayment Rule to reduce the payment proportionally to reflect the amount of principal that has been prepaid. If the prepayment treatment is Refinance, the current payment is reduced as follows:

Current Payment = Current Payment * (1 - prepayment factor)

If the payment treatment is Curtailment, the current payment remains constant, effectively reducing the term of the instrument.