Mortgage loan reason, option, mortgage, why

nixie24

Hi,

Can you help explaining the the reason of why issuing a mortgage loan is like issuing a bond and then write a call option on the principle of the loan?

thanks.

ftwcfa

Robert, thanks for the quick response.

What got me confused is the term "issuing". Is it selling or buying?

Also, write a call meaning "sell a call option"?

If you don't mind, please explain further. I'm very new at this.

Thanks

ajpheif16

In simple terms, as I see it ---> Mortgage loan similar to coupon bond in that mortgagor receives monthly interest + principal repayments, as opposed to a bullet maturity. i.e. there is a regular cash inflow.

Similar to american call option from point of view of mortgagee (buyer of option as I see it), in that they have the right to repay the mortgage at any time. i.e. to call the debt in.

RobertA

Thanks Robert, bebothoughts, and superinconsistent for your inputs. The professor corrected his question to this:

"Explain why a mortgage loan on a house is similar to a position in a coupon bond and an American call option."