Note that in the event the private exposure (q) understands the advantage from the price will get 0. Then precisely the impacted debtors tend to pay-off early, in the event the ex lover post interest rate stays large. However in happening out-of a decreasing interest every debtors usually pay off very early. Those people for just who the benefit from the offer remains b commonly pay-off early and take up a different sort of borrowing from the bank within a lowered interest. The rest, to own which the private chance features know will repay very early. In their eyes the newest get from the price is 0.
It reinvests the fresh paid back mortgage in one interest rate as the lending rates
In the model a risk premium exists only for the first credit and not for the second credit.
Read morestep three.3 Data of rule away from presumption injuries getting early payment