Patent ID: 7707101

Claim:
A computer-implemented method for operating on data to value a loan to a borrower, where the loan has an option, the method comprising: determining, by a computer system, the probability of the borrower transitioning from one credit rating to another based on a Markov chain transition matrix of rating transition probabilities that is calibrated to current market conditions based on a relevant credit curve selected based on the credit rating of the borrower, wherein the computer system comprises one or more computers that comprise a processor and a computer memory; valuing the loan option, by the computer system, wherein valuing the loan option comprises determining for each credit rating whether the borrower will stand or exercise the loan option based on a state machine; and determining, by the computer system, a present value of the loan based on the value of the loan option, wherein: a first state of the state machine corresponds to a regime where the valid actions of the borrower with respect to the loan option comprise staying the loan, canceling the loan, prepaying the loan, and drawing upon the loan; a second state of the state machine corresponds to a regime where the valid actions of the borrower with respect to the loan option comprise staying the loan, canceling the loan, and drawing upon the loan; and a third state of the state machine corresponds to a regime where the valid actions of the borrower with respect to the loan option comprise staying the loan, canceling the loan, and prepaying the loan, the first state leads to the second state when the borrower's action is to pre-pay the loan when in the first state; the first state leads to the third state when the borrower's action is to draw on the loan when in the first state; the second state leads to the third state when the borrower's action is to draw on the loan when in the second state; and the third state leads to the second state when the borrower's action is to pre-pay the loan when in the third state; and wherein the computer system determines the present value of the loan based on a sum of a value for a funded part of the loan and a value for an unfunded part of the loan, wherein the values for the funded part and unfunded part of the loan are determined based on the state of the state machine.