SPV April 2009 - Spread Models

Fair value pricing plays an important role for Danish banks since the international accounting standard IAS 39 requires all listed companies to value their financial instruments at fair value with changes in fair value being recognized in profit and loss. For liquid bonds the value is normally equal to the observed market price while for illiquid bonds the fair value is calculated using a valuation model.

In the theme of this release we introduce and analyze four different models which may be used as basis for fair value pricing. We find that a model using a coupon/cap rate dependent OAS performs well when we calculate the spreads on basis of a sample comprised of liquid bonds. Moreover, we also obtain promising results with a model using the same sample but where we further divide the bonds by end year.