How Bond Projection Systems Estimate Market Values Between Repricings
Summary
The document examines how a bond cash flow projection system might assign market values across long interest-rate scenarios without fully repricing every security each month. It describes a common computational compromise: perform full repricing at spaced intervals, then estimate intervening values by discounting previously projected cash flows using updated rates or by amortizing market value using book yield. The answer notes that some systems can reprice monthly, but at significant computational cost.
For mortgage-backed securities, full valuation can involve Monte Carlo option-adjusted spread methods with many paths and security-level prepayment projections, making frequent recalculation burdensome. The document describes a single-path alternative that uses forward rates derived from the current spot curve to project prepayments and spot rates for discounting. These approaches are presented as general industry practices; the respondent explicitly cannot confirm BondEdge’s specific method. Actual system behavior and accuracy therefore require vendor confirmation and depend on instrument complexity and valuation settings.
Key ideas
- Projection systems may reserve full repricing for selected dates and estimate market values between them.
- Interim values can use updated-rate discounting or book-yield amortization.
- Mortgage valuation with Monte Carlo prepayment paths can be computationally demanding.
- A single forward-rate path offers a simpler way to update projected prepayments and values.
- The described methods are general practices, not a verified account of BondEdge.
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Full text
# CMS BondEdge "cash flow testing" (forecasts) and market values # CMS BondEdge "cash flow testing" (forecasts) and market values CMS BondEdge is able to produce a stream of cash flows for a portfolio of bonds, by cusip, over a variety of interest rate scenarios. In the "cash flow testing" exercise at insurance companies, these interest rate scenarios are monthly for 50 years. The rules for whether a security prepays or not (or the level of prepayment) would seem to be relatively straightforward. What is not straightforward is how BondEdge is also able to provide a market value for the securities at every date. It is quite clear that the system is not revaluing every security at every date. So how might they be doing this? ## Answer by Bond wiz (score 1) https://quant.stackexchange.com/a/45429 Some hosted systems can reprice monthly, such as FactSet’s ALM tool. This is computationally expensive, and a user option. It is more common to reprice something like every 12/24/36 months in the projection. For cashflows between these “full” repricings, it will re-use either the most recent cashflows discounted by the new rates or it will amortize MV using book yield. I can’t speak for BondEdge specifically but I’m sure their support could shed some light on their methodology. Typically mortgages are priced using a Monte Carlo OAS approach with >200 paths and associated prepayments. For a CMO, this needs to be done per pool or repline so you can easily be looking at thousands of prepays for a single security, each month in the projection. To get around this, most systems will use a “single path” for cash flow repricing, which is just using forward rates derived from that month’s spot curve for prepayment projection (and the spot rates for discounting). Much easier than full Monte Carlo and you still get changes in prepays.
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