The value of mortgage prepayment and default options

Yong Chen, Michael Connolly, Wenjin Tang, Tie Su

Research output: Contribution to journalArticlepeer-review

9 Scopus citations


We use an implicit alternating direction numerical procedure to estimate the value of a fixed-rate mortgage (FRM) with embedded default and prepayment options. The value of FRMs depends on interest rates, the house value, and mort- gage maturity. Our numerical results suggest that the joint option value of pre- payment and default is considerably high, even at loan origination. We extend the model to include prepayment penalties in FRM valuation.

Original languageEnglish (US)
Pages (from-to)840-861
Number of pages22
JournalJournal of Futures Markets
Issue number9
StatePublished - Sep 2009

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance
  • Economics and Econometrics


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