7.8.15.1 Prepayment - User Defined Tenors

Users can define Prepayment dates, irrespective of contractual payment dates, via User-defined tenors. This is applicable for AMRT_TYPE_CD of 700 (early redemption and prepayment), 100, 500, 820, and payment schedule.

Note:

The payment schedule is only applicable to the prepayment treatment of curtailment. User-defined Early Redemption Is applicable only for AMRT_TYPE_CD of 700.

Table 7-11 Example of Combination for defining the Prepayment Rate

Balance Type	Prepayment Rate Type
Current Balance	Annual Prepayment Rate
Current Balance	De-annual Prepayment Rate
Reducing Balance	Annual Prepayment Rate
Reducing Balance	De-annual Prepayment Rate

If the Balance Type is selected as ‘Current Balance’, then the prepayment amount will be calculated using CUR_PAR_BAL on As of Date, i.e. without reducing the balance by any payment/prepayment that may have occurred between as of the date and Pre-Payment Date.

If the Balance Type is selected as ‘Reducing Balance’, then the prepayment amount will be calculated using balance as on Prepayment Date, i.e. after reducing the CUR_PAR_BAL by any payment/prepayment that may have occurred between as of the date and prepayment date.

The Prepayment Rate Type can be Annual Prepayment Rate or De-annual Prepayment Rate. When the Annual Prepayment Rate is selected then the prepayment rate entered in the screen is directly used. In the other case, the rate entered in the screen is de-annualized before calculating the prepayment amount.

Table 7-12 Example of Maturity Dates

Start Maturity Date	End Maturity Date	Tenor	Multiplier	Percent	Repeat
01/01/1900	31/12/2016	1	M	5	12
6	M	4	24
01/01/2017	31/12/2499	3	M	8	4
9	M	10	15

• For the first case, where the contract starting Maturity date is 01/01/1900 and Ending Maturity date is 31/12/2016, there will be 12 prepayments at monthly intervals followed by 24 prepayments at the half-yearly interval.

  First Tenor is relative to As of Date, that is the first prepayment will be on ‘As of Date + 1 month’ followed by 11 prepayments are 1-month interval each. Thus, the Engine generates 12 Prepayment Events processing each of the Percentage for the respective event.

  The second Tenor is 6M will start after 12 months, so the actual prepayment tenor will be 18M. Similarly, Engine will generate 24 Prepayment Events processing each of the Percentage for the respective event.

• For the second case, where contract start Maturity Date is 01/01/2017 and End Maturity Date is 31/12/2499, there will be 4 prepayments at quarterly intervals followed by 15 prepayments every 9 months. In this case. The engine will generate 4 and 15 events, respectively.

  The following logic is performed for prepayment and early redemption calculation:

1. Determine User-defined Prepayment Dates. The user needs to select Tenor and Multiplier. Prepayment/ Early Redemption will happen on the selected Tenor Multiplier.
2. Determine User-defined Prepayment Rates. The user needs to define Prepayment rates for each defined Tenor Multiplier that will be used for prepayment amount calculation. Base Prepayment Rate = Constant Rate defined from UI / 100.
3. Adjust for Seasonality 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. Prepayment Rate = Seasonality Factor * Base Prepayment Rate
4. Check Prepayment in Full Option. If the adjusted prepayment rate is equal to 100%, the instrument is paid off in full.
5. Derive Prepayment Factor When Prepayment Rate Type is ‘De-annual’ then: Prepayment Factor = 1- (1- Prepayment Rate)^(1/Payments per year) Where; Payments per year = 365 / (Current prepayment date – Previous prepayment date) When Prepayment Rate Type is ‘Annual’ then: Prepayment Factor = Prepayment Rate
6. Determine the prepayment amount. The amount of runoff due to prepayments is calculated. The prepayment factor is applied to the current par balance or reducing balance depending on the Balance Type selected. For Dynamic Business it is applied on Original Balance. Prepayment Runoff = Current Par Balance or Reduced Par Balance * Prepayment factor. If the prepayment factor is equal to 100%, the instrument is paid off in full.
7. Update the current balance. The current balance must be reduced by the amount of prepayment runoff. Current Balance = Current Balance - Prepayment runoff
8. If Prepayment treatment is Refinance, the current payment is recalculated, on the payment date, depending on AMRT_TYPE_CD. When AMRT_TYPE_CD is 100, 500, current payment is recalculated using the Current Payment formula (already detailed in this chapter, subsection: Payment Calculation Steps).

   Figure 7-2 Current Payment Formula

   
   

   

   
   
   When AMRT_TYPE_CD is 820, the current payment is recalculated using the current balance and the remaining number of payments.
   Current Payment = Current balance/ remaining number of payments.
   With User-defined Prepayment Tenors, there can be multiple prepayments within a payment event. Balance can decrease due to prepayment before the next payment event. Hence interest is calculated on each prepayment event on the reduced balance.
   For example, a record processed on an as-of-date of 03/31/2011 with the last payment date of 01/31/2011, and next payment date of 07/31/2011 and payment frequency of 6M. User-defined Prepayment Tenor of 1M, 2M, 6M is defined. There will 2 prepayment events between the last payment date to the next payment date on 4/30/2011 (as of date+1M), 5/31/2011 (as of date +2M). Interest will be calculated on 4/30/2011 from the last payment date, and 5/31/2011 from 4/30/2011. On payment event date of 7/31/2011 interest will be calculated from 5/31/2011. On 7/31/2011 interest cash flow populated will comprise of interest from the last payment date till the next payment date.
   On the following payment date of 1/31/2012, interest will be calculated from 7/31/2011 till 9/31/2011 (prepayment event). Interest will be calculated on 1/31/2012 from 9/31/2011. On 1/31/2012 populated interest, cash flow will comprise interest from 7/31/2011 till 1/31/2012.

   Note:

   INT_TYPE =2 (Interest in Advance) is not supported for User-defined Prepayment Tenors. Record modeled with User-defined prepayment (early redemption) with INT_TYPE=2, will be treated as INT_TYPE=1 (Interest in Arrears).