Prisfastsættelse af fastforrentede konverterbare realkreditobligationer

Mille Lykke Helverskov & Thomas Lund

Student thesis: Master thesis


In this master thesis a pricing model for Danish fixed rate callable mortgage bonds is developed. The Danish market for mortgage loans is one of the largest and most liquid in the world. High transparency and legal restrictions are the main factors that secure the investor. Danish mortgage bonds are described as safe investments. A callable bond has an embedded option which gives the borrower the right to repay his loan at par, at specified dates prior to maturity of the loan. The borrowers do not always act entirely rational and the gain by exercising the option is not the only factor that decides if a borrower exercises at a given time. This complicates the pricing procedure, and therefore a prepayment model which takes other factors into account has to be developed. First a term structure model is estimated with market data as input. Both the current zero coupon rates and implied volatility of swaptions is matched. This model assumes to describe the possible future development of the short rate. The term structure is used in the pricing model for discounting cash flows and calculation of refinancing incentives. Then a prepayment model is estimated on the basis of historical prepayments and borrower compositions. This model describes the conditional prepayment rate as a function of the gain by exercising, the relative time to maturity and the poolfactor. The pricing model is developed on the basis of the term structure model and the prepayment model. It is assumed that the value of a callable bond can be divided in two: The value if every borrower prepays their loans and the value if none of the borrowers prepay their loans. Then the expected future cash flows can be found in every state and discounted back to the value date. Generally the pricing model does a good job and the model prices relatively close to the market price.

EducationsMSc in Business Administration and Management Science, (Graduate Programme) Final Thesis
Publication date2010
Number of pages109