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11-26-2009, 10:58 AM
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Financial Theory: When do you pay on a...
...mortgage? I'm not sure how to get solution? "consider a 2 year 7% mortgage, with annual payments. Suppose the 1 year interest rate is 6%, with 0 drift, and 100% volatility. when should you prepay?"Answer: You could prepay immediately for a gain of .14, but the wiser move is to wait until the end of year 1, where he could either break even or gain 2.31How is this problem solved?
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