This paper describes a model for calculating spread values and effective durations of Danish mortgage-backed bonds. Mortgage backed bonds differ in various aspects from garden-variety bonds: In addition to interest rate risk, they are exposed to both borrower and bank credit risk, and to mortgage specific prepayment risk, i.e., the fact that some mortgagors prepay the principal of their loans ahead of schedule when it becomes financially advantageous for them to do so.

We developed an Implied Prepayment model to calculate spread values and effective Durations for Danish Mortgage Backed Bonds (MBB). By using an implied prepayment model, constructed by fitting a generic functional form to market prices of liquid Danish MBB, we take the market price of prepayment risk into account and produce consistent results. Since only current pricing data are used as a model input this approach does not require access to a historical database of prepayment data. This will...