Abstract
This article considers an amortized fixed rate mortgage where the borrower has the choice of prepayment. Asymptotic behaviors of the contract value are fully analyzed. Based on a known fact about the optimal prepayment boundary, two analytical approximations to the value of the mortgage contract are derived. Numerical experiments are carried out to validate the accuracy of the approximation formulas. In general, the relative error is less than 4%.
| Original language | English |
|---|---|
| Journal | IAENG International Journal of Applied Mathematics |
| Volume | 39 |
| Issue number | 1 |
| Publication status | Published - 17 Feb 2009 |
| Externally published | Yes |
Keywords
- Approximation
- Asymptotic analysis
- Fixed rate mortgage
- Mortgage valuation