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Lecture 17 - Callable Bonds and the Mortgage Prepayment Option

Lecture 17 - Callable Bonds and the Mortgage Prepayment Option

This video was recorded at YALE - ECON 251 - Financial Theory. 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...

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