22.2.5 Defining the Arctangent Calculation Method

The Arctangent Calculation Method uses the Arctangent Mathematical Function to describe the relationship between Prepayment Rates and spreads (coupon rate less Market Rate). Use this procedure to define Prepayment Assumptions using the Arctangent Calculation Method.

Prerequisites

Performing basic steps for creating or updating a Prepayment Rule.

Procedure

Prepayment under this method occurs on Payment Dates only.

  1. Define the source for the Market Rate by Selecting an Index (Interest Rate Code) from the list of values.
  2. Enter the Spread.
  3. The spread is added to the rate from the underlying interest rate curve to determine the market rate.
  4. Select an Associated Term: Original Term, Reprice Frequency, or Remaining Term.
  5. Specify the Arctangent Argument table parameters.
  6. Select the Start Origination Date using the date picker. Alternatively, you can enter the Start Origination Date in the space provided.
  7. Enter the values for the Arctangent parameters (columns K1 through K4) for each Start Origination Date in the table. The valid range for each parameter is -99.9999 to 99.9999.
  8. Click Add Another Row.
  9. You can add as many rows in this table as you require. However you need to enter relevant parameters for each new row.
  10. You can also use the Excel import/export feature to add the Prepayment rate information.
  11. Define the Seasonality assumptions as required to model date specific adjustments to the annual prepayment rate. Inputs act as multiplier, For example, an input of 2 will double the prepayment rate in the indicated month.