1. Asset Liability Management Cloud User Guide
  2. Business Rules Administration
  3. Application Specific Rules
  4. Prepayment Rules
  5. Defining Prepayment Methodologies
  6. Defining Prepayments Using Node Level Assumptions

4.3.3.3.1 Defining Prepayments Using Node Level Assumptions

Node Level Assumptions allow you to define assumptions at any level of the Product Dimension Hierar­chy. The Product Dimension supports a hierarchical representation of your chart of accounts, so you can take advantage of the parent-child relationships defined for the various nodes of your product hierarchies while defining Rules. Children of Parent nodes on a hierarchy automatically inherit the assumptions defined for the Parent nodes. However, assumptions directly defined for a Child take pre­cedence over those at the Parent level.

Prerequisites

Performing basic steps for creating or editing a Prepayment Rule.

Procedure

This table describes key terms used for this procedure.

Table 4-40 Key Terms used for Prepayment Rules

Terms Description
Calculation Method The method used to model prepayment behavior of instru­ments. You can choose from four pre­payment calculation methods: Constant, Prepayment Model, PSA, and Arctangent.
Cash Flow Treatment

Allows you to specify one of the following two ways in which prepayments are made.

  • Refinance: This is the most used option. Select refinance to keep payment amounts after pre­payment consistent with a portfolio-based assump­tion. This reduces the scheduled payment amount on each loan and maintains the same maturity term.
  • Curtailment: Select curtailment to change the peri­odic payment amounts due. The prepayments are treated as accelerated payments, with a payoff earlier than the originally scheduled term.
Prepayment Date You can select when to calculate prepayment, either on normal payment dates or user-defined tenor.
Payment Event Type When prepayment is calculated on payment dates then this option allows you to specify type of event when prepayment occurs. By default, “Principal and Interest” is selected.
Market Rate The market rate is defined as the sum of the Index (the Yield Curve Rate as described by the Interest Rate Code) and the Spread (the difference between the customer rate and market rate).
Associated Term

Allows you to define the term for the point on the yield curve selected in the Market Rate Definition that will be used in obtaining the market rate.

  • Remaining Term: The number of months remaining until the instrument matures.
  • Reprice Frequency: The frequency with which the instrument reprices. This defaults to the original term for a fixed-rate instrument.
  • Original Term: The number of months that was the originally scheduled life of the instrument.
Prepayment Rate Definition This table allows you to specify the constant annual prepayment rate, or the associated factors, that you want to apply to the instruments having origination dates in a particular date range.
Seasonality

This table allows you to specify seasonality adjustments. Sea­sonality refers to changes in prepayments that occur predict­ably at given times of the year.

Seasonality adjustments are based on financial histories and experiences and should be modeled when you expect the amount of prepayments made for certain types of instruments to increase or decrease in certain months.

The default value for seasonality factors is 1, which indicates that no seasonality adjustment is made for a month. Changing the seasonality factors is optional. You can change the season­ality factors for none, one, or multiple months.

To make seasonality adjustments, you need to enter a value between 0.00 and 99.9999 for the seasonality factors associ­ated with each month. Seasonality factors less than 1 mean that prepayments are decreased for a particular month. Sea­sonality factors greater than 1 indicate that prepayments are increased for a particular month.
  1. Navigate to the Prepayment Assumption Details Page after selecting a Currency and one or more products from the hierarchy.
  2. Select a Cash Flow Treatment type, Refinance or Curtailment.
  3. Refinance is the most used method.
  4. Select a Calculation Method as Constant, Prepayment Model, PSA, or Arctangent.

    Note:

    The default value for the Calculation Method drop-down list is Constant. If you select "Do not calculate" as the calculation method, no prepayment assumptions will be assigned to the particular product-currency combination. This is a particularly useful option when using node-level assumptions because it allows you to exclude a particular Child from inheriting a Parent assumption.
  5. Define the parameters and annual prepayment rates for the selected Calculation Method as Con­stant, Prepayment Model, PSA or Arctangent.

    Note:

    The parameters displayed on the Prepayment Methodology page vary depending on the Calculation Method (Constant, Prepayment Model, PSA, or Arctangent) that you have selected. For more infor­mation, see:

  6. Click Apply.

    The Assumption Browser Definition Page is displayed.

    At this point you can:

    • Continue defining additional methodologies for other product-currency combinations by repeating the above procedure.
    • Complete the process by clicking Save.

    When you click Save, the prepayment assumptions are saved and the Prepayment Rule Summary Page is displayed.