what does 'high variance' mean on mortgage

It means after it’s paid the 9–the company’s issued a bond promising to pay 9 for say 10 years and then the principal in the 10th year, this is year 10, the total of 109. So at any time the company has the option of calling the bond. So the bond pays 9 percent, 9 percent and then some years later it pays 109, but at any point in time you have the option, the company has the option of calling the bond, and calling it for–so it’s going to pay 9 + 100 at the end, so here it’s 9. So callable bonds are issued by corporations and they pay, usually, an interest rate, say 9 percent. So let’s start here with the callable bond problem. So let’s start with the callable bond problem. So I want to teach you how to think about that problem. And all of you at some time in your lives will probably own houses and have a mortgage option and have to think about what kind of mortgage to get and what the option is. So this time we’re going to apply that reasoning to the two most important options in the economy, one is callable bonds and a much more important one is the mortgage option. So this time we’re going to apply that–and that the way to figure out exactly what it’s worth and exactly what to do is to work by backward induction. That’s the simplest kind of option.Īnd we discovered through two examples, at least, that the option is worth more than people realize. You either do something or you don’t do it.

So last time we found out how to evaluate options, especially stopping options where you don’t have so many options. Professor John Geanakoplos: I think I’ll try to start.

Introduction to Callable Bonds and Mortgage Options Financial Theory ECON 251 - Lecture 17 - Callable Bonds and the Mortgage Prepayment OptionĬhapter 1.

What does 'high variance' mean on mortgage