Open Yale CoursesECON 251: Financial TheoryLecture 17 - Callable Bonds and the Mortgage Prepayment Option<< previous session | next session >>Overview:This lecture is about optimal exercise strategies for callable bonds, which are bonds bundled with an optionthat allows the borrower to pay back the loan early, if she chooses. Using backward induction, we calculatethe borrower's optimal strategy and the value of the option. As with the simple examples in the previouslecture, the option value turns out to be very large. The most important callable bond is the fixed rate
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Mortgage loan, Callable Bonds, Mortgage Prepayment Option, important callable bond