Managing the risk of loan prepayments and the optimal structure of short term lending rates |
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Authors: | Bryan Stanhouse Duane Stock |
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Institution: | (1) Finance Division, Price College of Business, University of Oklahoma, 205A Adams Hall, Norman, OK 73019, USA |
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Abstract: | Loan pricing is an extremely important aspect of bank operations because loans are typically over two-thirds of bank assets.
Many researchers have analyzed the theoretical and empirical impact of how different factors should and do affect fixed rate
loan rates and loan prepayments. However, a theoretical decision making model for maximizing expected profit in a declining
rate environment has not been developed. After describing the conditions for the optimal loan rate, we develop numerical solutions
for it under varying conditions. The varying conditions include the trend in interest rates, volatility of interest rates,
and loan maturity.
We thank Yen Low and Hamed Bagherpour for their assistance. |
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Keywords: | Loans Prepayment Interest rate risk |
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