Notice that if your private chance (q) understands the benefit in the offer becomes 0. Next precisely the affected debtors have a tendency to pay very early, in the event the ex lover post interest stays higher. However in the scenario of a lessening interest rate the debtors commonly pay-off very early. Men and women to have who the bonus on bargain remains b have a tendency to pay back early and take upwards an alternative borrowing from the bank within a reduced interest. The remainder, for which the non-public exposure has actually know may also pay-off early. For them this new gain about offer could be 0.
They reinvests the brand new paid down mortgage in one interest rate because the new credit price
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. Devam