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Commercial loan borrower's optimal borrowing and prepayment decisions under uncertainty

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  • HuiChen Chiang

Abstract

We model a firm which faces continuing stochastic money needs and fluctuating interest rates. The borrower minimizes the expected present value of the sum of interest payments and prepayment penalty costs subject to a liquidity constraint. Since contingent opportunities are absent from the model, we find (i) the firm should not inventory cash, (ii) the firm should prepay the maximum amount possible if it prepays at all.

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  • HuiChen Chiang, 2007. "Commercial loan borrower's optimal borrowing and prepayment decisions under uncertainty," Applied Economics, Taylor & Francis Journals, vol. 39(8), pages 1013-1020.
    • Handle: RePEc:taf:applec:v:39:y:2007:i:8:p:1013-1020
    DOI: 10.1080/00036840500461972
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    Cited by:

    1. Hui Chen Chiang, 2007. "Optimal prepayment behaviour," Applied Economics Letters, Taylor & Francis Journals, vol. 14(15), pages 1127-1129.
    2. HuiChen Chiang, 2007. "Financial intermediary's choice of borrowing," Applied Economics, Taylor & Francis Journals, vol. 40(2), pages 251-260.

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