| Summary: | 碩士 === 國立中山大學 === 財務管理學系研究所 === 102 === We use the implicit difference method to measure the influence of four types of penalties on the value of a fixed-rate mortgage (FRM) that has a default and prepayment option and different types of penalties. Bankers realize the influence of prepayment penalties on a mortgage’s value for different house value volatilities and loan-to-value ratios (LTV ratios) through a simulation procedure. Financial institutions can consider the macroeconomic and financial conditions and then design a suitable mortgage contract to avoid borrowers’ prepayment and default behavior. Furthermore, financial institutions can stabilize their profit and operations.
Our simulation results reveal that when the percentage of the prepayment penalty of the whole contract is higher, the influence of this penalty on the mortgage’s value is larger. Financial institutes can use different types of penalties to increase their mortgage loan, but penalties also raise the boundary of default when they are at a low interest rate.
Additionally, the relationship between prepayment penalty and the contract also exists at different LTV ratios. We further addressed the option’s value and found that it did not have a linear relationship with the LTV ratios.
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