The value of mortgage prepayment and default options

Published

Journal Article

We use an implicit alternating direction numerical procedure to estimate the value of a fixed-rate mortgage (FRM) with embedded default and prepayment options. The value of FRMs depends on interest rates, the house value, and mort- gage maturity. Our numerical results suggest that the joint option value of pre- payment and default is considerably high, even at loan origination. We extend the model to include prepayment penalties in FRM valuation. © 2009 Wiley Periodicals, Inc.

Full Text

Cited Authors

  • Chen, Y; Connolly, M; Tang, W; Su, T

Published Date

  • September 1, 2009

Published In

Volume / Issue

  • 29 / 9

Start / End Page

  • 840 - 861

Electronic International Standard Serial Number (EISSN)

  • 1096-9934

International Standard Serial Number (ISSN)

  • 0270-7314

Digital Object Identifier (DOI)

  • 10.1002/fut.20388

Citation Source

  • Scopus