Wiedie, Ann H.
The effect of varying interest rates (from the contracted) on yield rates to the bank during mortgages when incorporating the risk to banks of refinance is discussed. Present and current values for each prepayment year of a mortgage are calculated. Assuming prepayment year follows a truncated Poisson distribution, resulting distributions of present values, current values and yield rates are displayed by example. How these values affect the technique of immunization is also discussed.
Worcester Polytechnic Institute
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