5.3.6.2.1 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 5-24 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.
|
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.
|
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. |
- Navigate to the Prepayment Assumption Details Page after selecting a Currency and one or more products from the hierarchy.
- Select a Cash Flow Treatment type, Refinance or Curtailment.
- Refinance is the most used method.
- 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. - 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:
- 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.