Credit Risk and Prepayment Option

Philippe Artzner and Freddy Delbaen

ASTIN Bulletin, 1992, vol. 22, issue 1, 81-96

Abstract: The paper examines a type of insurance contract for which secondary markets do exist: default risk insurance is implicit in corporate bonds and other risky debts. It applies risk neutral martingale measure pricing to evaluate the option for a borrower with default risk, to prepay a fixed rate loan. A simple “matchbox” example is presented with a spreadsheet treatment.

Date: 1992
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