Notice that if for example the personal chance (q) realizes the benefit on contract becomes 0. Upcoming precisely the inspired debtors will pay back very early, should your ex article interest rate remains high. However in the outcome regarding a bringing down rate of interest most of the debtors often pay off early. Men and women to possess who the bonus regarding the contract remains b have a tendency to pay-off early or take right up a new borrowing from the bank at a reduced rate of interest. The remainder, having who the private risk has knew will also pay off early. For them new gain regarding offer could well be 0.
It reinvests new paid loan at the same rate of interest given that new lending 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. In the real world it would however recover its handling costs, which are in the model assumed to be 0. This assumption avoids an infinite regress for the calculation of the risk premium without affecting the main point of the analysis. Otherwise, the calculation for the risk premium of the second contract would require the possibility of a third contract and so forth.
Now assume that the first credit is taken up not in the high interest period but in a low interest period \(_<1>=_<1,l>\) . In that case the future, post contractual interest rate can by assumption not further decline. Ler mais
