SPV January 2012 - Pricing Curves for Mortgage Bonds

This release of SPV introduces a new prepayment model (M7) that includes the modelling of Fixed-to-Float prepayment studied in the themes of SPV 11Q1 and SPV 11Q2. The DMBS model is still the M6 model though.
In the last theme of SPV we described the use of two curves in valuation of floating rate bonds - a pricing curve for discounting and a fixing curve for calculating reset rates. Attention was mostly given to how the fixing curve was estimated and used. In this theme we will focus on the choice of the pricing curve and see what impact it has on calculations of Danish fixed-rate mortgage-backed bonds. We will construct four curves - SWAP, government, segment, and OIS - and see the impact on loan yield spreads, option-adjusted spreads, and model prices.