See that in the event the personal exposure (q) knows the benefit regarding the contract becomes 0. Next just the inspired debtors often pay off early, in case your ex lover article interest rate stays highest. However in possible regarding a lessening interest all of the debtors have a tendency to pay-off very early. The individuals to own which the benefit from the price stays b commonly pay-off early and take upwards a different sort of borrowing within less interest rate. The rest, for just who the non-public risk keeps understood will additionally pay early. To them the brand new acquire about price would-be 0.

They reinvests the latest reduced mortgage in one interest since the the credit 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. Continue reading step 3.3 Data of one’s signal out-of assumption problems for premature fees →