20.1 Create Prepayment Models

Creating a Prepayment Model comprises the following sub procedures:

1. Creating Prepayment Models
2. Defining the structure of the Prepayment Model
3. Assigning Node Values

You can create Prepayment Models with following Rate Calculation options:

• Manual
• External Model
• Integrated Model

This table describes key terms used for this procedure.

Table 20-1 Fields to create Prepayment Model

Term	Description
Dimension	Influences the prepayment behavior of an instrument. You can build a prepayment model using up to three prepayment dimensions. Each dimension maps to an attribute of the underlying transaction (For example, age/term or rate and so on) so the cash flow engine can apply a different prepayment rate based on the specific characteristics of the record.
Lookup method	Used to calculate prepayment rates for the prepayment dimension values that do not fall exactly on the defined pre­payment dimension nodes. Oracle Asset Liability Management offers the following lookup methods: Interpolation: Under this method, the prepayment rates are determined by calculating an exact value on an axis. This method assumes that prepayment speeds change on a straight-line basis between the two nodes and calculates accordingly Range: Under this method, the prepayment rates are determined by calculating a range of values on an axis. This method assumes that the prepayment speed will remain the same for the entire range. The following example explains the differences between these two lookup methods. The following lists show the age and cor­responding prepayment rates of instruments. Age 12 24 36 60 Prepayment Rates 5 10 15 20 Under the Interpolation method, the prepayment speeds increase gradually. In this example, the Interpolated prepay­ment rate of an instrument aged 30 months is 12.5%. This is exactly halfway between the 10% and 15% rate. However, the Range method, the Prepayment speeds increase in steps. Using the Range method, the prepayment rate is 10%, as this rate percentage would apply to the range from 24 months to 35.9999 months.
Nodes	Exact points for each dimension where attribute information has been defined.
Prepayment Rate Calculation	Select Manual, Integrated Model, or External models. For more information, see the Prepayment Rate Calculation section. Note: Only ‘Manual’ option is available to in CFE.

1. Navigate to the Prepayment Model summary page.
2. Complete standard steps for this procedure. For more information, see Creating Rules section.

   Figure 20-1 Prepayment Model

   
   

   

   
   
3. In case of ALM/FTP/BSP, select prepayment rate calculation which could either be manual, integrated or external model.