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Abstract: This paper considers a mortgage contract where the borrower pays a fixedmortgage rate and has the choice of making prepayment. Assume the marketinterest follows the CIR model, a free boundary problem is formulated. Here wefocus on the infinite horizon problem. Using variational method, we obtain ananalytical solution to the problem, where the free boundary is implicitly givenby a transcendental algebraic equation.



Author: Dejun Xie

Source: https://arxiv.org/







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