Note that if the individual exposure (q) finds out the main benefit on the offer becomes 0. Up coming only the impacted debtors have a tendency to pay off very early, if the ex blog post interest rate remains large. However in the truth regarding a lessening interest rate all of the debtors tend to pay off very early. Those people to have just who the bonus regarding the package stays b often pay off very early and take right up an alternative borrowing in the less rate of interest. The remainder, to possess which the non-public chance enjoys know might repay very early. In their mind brand new obtain on contract might possibly be 0.
They reinvests the fresh new paid down mortgage at the same interest while the brand new lending speed
In the model a risk premium exists only for the first credit and not for the second credit. If the debtor takes up the second credit at the low interest rate ( \(_<2l>)\) the interest rate cannot-by assumption-decline any more in future. The bank cannot impose a risk premium on the second credit, because the bank has no damage if the second credit is also prematurely repaid.