Interest Rate Spreads

Interest rate spreads define, apart from reference interest rates, the markups and markdowns that can be stored in the system independent of the yield curve. They can be positive or negative.

Interest spreads are managed in the system as follows:

• Create the required interest rate spread types in Customizing. This enables interest rate spreads to be entered in the system automatically in the same way as it is entered manually for every combination of reference interest rate and interest rate spread type.

• You can store the spread type at any yield curve. Yield curves for which a spread type is defined become yield curves with a spread. Before the yield curve is created from the market data, that is, before the discount factors are calculated from the reference interest rates and the interest rate spreads, reference interest rates and interest rate spreads are added by grid point. The system, therefore, assumes that the reference interest rate and interest rate spread conditions, such as the interest calculation method, are the same. This enables you to create a mortgage bond spread vis-à-vis government bond yields or a spread determined by rating agencies vis-à-vis government bond yields, for example.

  Note

  Note the following restrictions with regard to interest rate spreads:

  • The system only contains yield curves with or without a spread. No spread curve exists, however, as a difference curve from a yield curve with, and a yield curve without, a spread.

  • Spreads cannot be selected separately, nor can they be interpolated. Spreads are always added to a reference interest rate and the result is used to create a yield curve with a spread. You can carry out all the operations on a yield curve with a spread that you can carry out on a yield curve without a spread, such as the determination of interest rates.

  • A yield curve can use a maximum of one spread type, that is, you cannot add two or more spreads to a reference interest rate. This means that you cannot, for example, map “Spanish mortgage bond curve” = “German government bond curve” plus “country spread Spain” plus “mortgage bond spread Spain”.

In a yield curve with a spread, both the interest rate and the associated interest rate spread must be available as market data at a reference interest rate grid point for the grid point to be taken into account for the creation of the yield curve. If one of the two values is missing when the interest rate read procedure is considered, the entire grid point is ignored when the yield curve is created. Neither the interest rate nor the spread are, therefore, interpolated separately.

If reference interest rates or interest rate spreads are missing, information about these can be forwarded to the requesting user.

The following spread types are configured in the system:

You can then enter interest rate spreads for each combination of the spread types PFBR, AA, BBB, and the reference interest rates available in the system. It does not matter which risk category the actual reference interest rate belongs to.

If the yield curve ZK01 is available in the system with currency EUR with the reference interest rates R1, R2, R3, and R4, the yield curves ZK02, ZK03, and ZK04 can also be created for the yield curve ZK01. The only difference between these yield curves and the yield curve ZK01 is that they contain an additional spread type. You obtain the following yield curves:

Before ZK02, for example, can be created from the market data, this data is added up by grid point: reference interest rate R1 + PFBR spread for reference interest rate R1, and so on.