A Prepayment Model for the Danish MBB Market

May 1, 2007

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.