Loan Modelling with multiple interest rates

#1

Is it possible (or are there any examples) of modelling a loan using Strata that has several interest rates to replicate the behaviour of, for example, a mortgage with a fixed interest rate period followed by a remaining term that tracks a base rate + margin (e.g. Bank of England + 5%)?

The holiday, day count, and schedule generation looks like it’s exactly what I need to calculate the accrual periods. Should I model this as a Swap with a single SwapLeg? Do I then need to create some sort of custom market data to represent the interest rates that apply?

I’ve had a look at the examples in the repo, but can’t quite see one that matches this example.
Many thanks for your guidance!

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#2

There are no specific examples or code in Strata for this. As you surmise, you’d have to create a Swap in order to take advantage of the schedule and recurring payments. While unusual, it is perfectly possible to have a swap with 2 legs in the same direction where one leg is fixed for the first 2 years and one leg is floating for the remaining term:

Swap leg 1: Receive Fixed 5% 2019-06-01 to 2021-06-01
Swap leg 2: Receive Ibor variable% with a spread of 5% 2021-06-01 to 2039-06-01

The variable aspect would be obtained by adding an IborIndex via configuration that represents the Bank base rate. You would then pass in a Curve that represents the prediction of the base rate over time. SwapPricingExample might be the closest code example.

Stephen

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#3

Excellent, thanks. I’ll take a look with this info!

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