IRR-Solutions® II applies a number of default assumptions if the user chooses not to make his own assumptions. Following is a list of defaults applied by module:
Advanced Income Shock
Growth Assumptions:
Current balance is projected forward if no growth assumptions are made on an account and none are distributed from accounts higher in the subtotaling structure. Each month the newly captured balance will be projected forward. This is indicated with a 
icon.
Reinvestment Assumptions:
| 1. | If the user chooses not to specify a reinvestment rate, the system will utilize the accounts weighted average rate, calculated from the underlying runoff, to reinvest each portion of the reinvestment amount with its own weighted average rate. |
This reinvestment rate is adjusted up and down by the full shock scenario value to determine a reinvestment value in the respective scenarios.
| 2. | If a user entered an assumption which would take the reinvestment rate to zero or to a negative rate, a rate of 0.01 is substituted. |
Index Rate Assumptions:
No default rate assumptions are made. Each index that has active host items tied to it is required to be setup by the user.
Prepayment Assumptions:
| 1. | FinSer Investment Portfolio Accounting clients: |
IRR-Solutions® II clients that also utilize FinSer's investment accounting service will receive cash flows for their investment portion of the balance sheet for all shock scenarios for import into the model. These cash flows have street consensus prepayments assumptions built into the cash flows.
| 2. | No default prepayment assumptions are made for the rest of the balance sheet. |
Investment Item call feature:
The system applies the convention of a call spread to determine if an investment is considered called.
See the following example of how the call switch works in the system:
Investments on the Asset side of the balance sheet:
Reinvestment Rate < (Coupon - Call Spread) = the investment will be called
Scenario Example:
|
Reinvestment Rate |
< |
(Coupon - Call Spread) |
= |
Action |
-100 |
4.00 |
< |
(5.50 - .50) = 5.00 |
Call It |
|
+-0 |
4.18 |
< |
(5.50 - .50) = 5.00 |
Call It |
|
+100 |
5.13 |
< |
(5.50 - .50) = 5.00 |
Don't Call It |
Investments on the Liability side of the balance sheet:
Reinvestment Rate > (Coupon + Call Spread) = the investment will be called
Scenario Example:
Reinvestment Rate |
> |
(Coupon + Call Spread) |
= |
Action |
|
-100 |
3.15 |
> |
(5.95 + .5) = 6.45 |
Don't Call It |
|
+-0 |
4.15 |
> |
(5.95 + .5) = 6.45 |
Don't Call It |
|
+100 |
5.15 |
> |
(5.95 + .5) = 6.45 |
Don't Call It |
|
+200 |
6.15 |
> |
(5.95 + .5) = 6.45 |
Don't Call It |
|
+300 |
7.15 |
> |
(5.95 + .5) = 6.45 |
Call It |
You will notice the calculation is reversed for investments on the liability side versus the asset side.
There are two call options available in the system:
| 1. | Account Call Spread: |
The user has the option to apply an account call spread that will be used in evaluating all securities within that account to determine if it should be considered called in any of the shock scenarios. This assumption is applied in the Chart of Accounts screen.
If no call spread assumption is made, the security will be called without the addition of a call spread, i.e. the call spread used is zero.
| 2. | Item Call Spread: |
The user also has the option to apply a call spread on any individual security. This option would override the account call spread if it exists. For banks that import their securities from a third party will not have spreads in the imported file. The user will need to assign a call spread for each callable security.
If no call spread assumption is made, the security will be called without the addition of a call spread, i.e. the call spread used is zero.
Budgeting
Growth Assumptions:
Current balance is projected forward if no growth assumptions are made on an account and none are distributed from accounts higher in the subtotaling structure. Each month the newly captured balance will be projected forward. This is indicated with a icon.
Reinvestment Assumptions:
| 1. | If the user chooses not to specify a reinvestment rate, the system will utilize the accounts weighted average rate, calculated from the underlying runoff, to reinvest each portion of the reinvestment amount with its own weighted average rate. |
This reinvestment rate is adjusted per period based on parameters keyed to determine a reinvestment value in the respective time periods.
| 2. | If a user entered an assumption which would take the reinvestment rate to zero or to a negative rate, a rate of 0.01 is substituted. |
Index Rate Assumptions:
No default rate assumptions are made. Each index that has active host items tied to it is required to be setup by the user.
Prepayment Assumptions:
No default prepayment assumptions are made.
Investment Item call feature:
The system applies the convention of a call spread to determine if an investment is considered called.
See the following example of how the call switch works in the system:
Investments on the Asset side of the balance sheet:
Reinvestment Rate on the call date < (Coupon - Call Spread) = the investment will be called
Simulation Example:
|
Reinvestment Rate on Call Date |
< |
(Coupon - Call Spread) |
= |
Action |
Constant |
4.39 |
< |
(5.00 - .50) = 4.50 |
= |
Call It |
Estimated |
4.78 |
< |
(5.00 - .50) = 4.50 |
= |
Don't Call It |
Investments on the Liability side of the balance sheet:
Reinvestment Rate on the call date > (Coupon + Call Spread) = the investment will be called
Simulation Example:
Reinvestment Rate on Call Date |
> |
(Coupon + Call Spread) |
= |
Action |
|
Constant |
5.84 |
> |
(5.72 + .50) = 6.22 |
= |
Don't Call It |
Estimated |
6.23 |
> |
(5.72 + .50) = 6.22 |
= |
Call It |
You will notice the calculation is reversed for investments on the liability side versus the asset side.
There are two call options available in the system:
| 2. | Account Call Spread: |
The user has the option to apply an account call spread that will be used in evaluating all securities within that account to determine if it should be considered called in any of the budget simulations. This assumption is applied in the Chart of Accounts screen.
If no assumption is made, the security will be called without the addition of a call spread, i.e. the call spread used is zero.
| 3. | Item Call Spread: |
The user also has the option to apply a call spread on any individual security. This option would override the account call spread if it exists. For banks that import their securities from FinSer or a third party will not have spreads in the imported file. The user will need to assign a call spread for each callable security. This assumption is applied in either the Security Maintenance or Misc Data Entry tabs in Data Capture.
If no assumption is made, the security will be called without the addition of a call spread, i.e. the call spread used is zero.
Advanced Economic Value of Equity
Discount Assumptions:
If no discount assumptions are made, each host item in an account is discounted with the weighted average account rate. This rate is adjusted up and down by the full shock scenario value to determine a discount value in the respective scenarios.
Index Assumptions:
This assumption is shared with the Advanced Income Shock. See the above section for details.
Prepayment Assumptions:
This assumption is shared with the Advanced Income Shock. See the above section for details.
Investment Item call feature:
This feature is shared with the Advanced Income Shock. See the above section for details.