Lecture 17 - Callable Bonds and the Mortgage Prepayment Option

author: John Geanakoplos, Yale University
recorded by: Yale University
published: March 17, 2012,   recorded: November 2009,   views: 3182
released under terms of: Creative Commons Attribution No Derivatives (CC-BY-ND)
Categories

See Also:

Download Video - generic video source Download yalemecon251f09_geanakoplos_lec17_01.mp4 (Video - generic video source 800.4 MB)

Download Video Download yalemecon251f09_geanakoplos_lec17_01.flv (Video 360.2 MB)

Download Video Download yalemecon251f09_geanakoplos_lec17_01.wmv (Video 320.3 MB)

Download subtitles Download subtitles: TT/XML, RT, SRT


Help icon Streaming Video Help

Related Open Educational Resources

Related content

Report a problem or upload files

If you have found a problem with this lecture or would like to send us extra material, articles, exercises, etc., please use our ticket system to describe your request and upload the data.
Enter your e-mail into the 'Cc' field, and we will keep you updated with your request's status.
Lecture popularity: You need to login to cast your vote.
  Bibliography

Description

This lecture is about optimal exercise strategies for callable bonds, which are bonds bundled with an option that allows the borrower to pay back the loan early, if she chooses. Using backward induction, we calculate the borrower's optimal strategy and the value of the option. As with the simple examples in the previous lecture, the option value turns out to be very large. The most important callable bond is the fixed rate amortizing mortgage; calling a mortgage means prepaying your remaining balance. We examine how high bankers must set the mortgage rate in order to compensate for the prepayment option they give homeowners. Looking at data on mortgage rates we see that mortgage borrowers often fail to prepay optimally.

Link this page

Would you like to put a link to this lecture on your homepage?
Go ahead! Copy the HTML snippet !

Write your own review or comment:

make sure you have javascript enabled or clear this field: