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Use of conditional pricing

Hi all,

I have a client (a bank) who would like to model different home loans. Home loans have two interest rates associated with them - the actual annual interest rate, and the "comparison rate" which is the calculated taking into account all of the fees and charges paid over the life of the loan - this provides customers with a way of comparing two loans. The comparison rate is always higher than the actual interest rate (theoretically it could be the same if there were no absolutely fees, but it can never be lower).

I'd like to include both the interest rate and the comparison rate in my model. I suspect, despite the intent of the comparison rate, that most people actually pay more attention to the interest rate, but I need to prove this, so I'd like to include both.

I'm thinking the most efficient way to do this would be to set up the interest rate as a normal pricing variable, and then the comparison rate as a conditional pricing variable, but instead of allowing it to vary +/- 30%, only allow it to vary +40% (no negatives allowed, because the comparison rate can't be lower than the interest rate). The values I would give the conditional pricing would be the same as (or just above) the values for the pricing variable.

Is this the best way to set this up? Are there any pitfalls to beware of? Is it problematic that I am only allowing positive variations, and not negative? It feels like this should work, but I am seeking reassurance!

asked Aug 28, 2020 by Sharon Morris (295 points)

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