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.作者: ftwcfa 时间: 2011-7-11 17:28
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作者: ajpheif16 时间: 2011-7-11 17:28
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.作者: RobertA 时间: 2011-7-11 17:28
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."
