@article {Dunsky7, author = {Robert M. Dunsky and Thomas S.Y. Ho}, title = {Valuing Fixed Rate Mortgage Loans with Default and Prepayment Options}, volume = {16}, number = {4}, pages = {7--31}, year = {2007}, doi = {10.3905/jfi.2007.683315}, publisher = {Institutional Investor Journals Umbrella}, abstract = {There are three integral components to value a fixed rate mortgage loan: 1) the mortgagors{\textquoteright} American straddle option on the underling loan, (a call option to refinance and a put option to default); 2) the mortgagors{\textquoteright} heterogeneous behavior in exercising the options inefficiently; and 3) the market price of risk, [the option adjusted spread (OAS)]. Despite the dominance of mortgages in the capital market, scant research considers the valuation of mortgage loans while taking these three components into consideration, a contribution of this article. Specifically, this article uses a multinomial logit model to describe the mortgagors{\textquoteright} behavior in dealing with the competing refinancing and default risks, and then utilizes a two factor arbitrage-free interest rate model to value the mortgages.TOPICS: Fixed income and structured finance, options, simulations}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/16/4/7}, eprint = {https://jfi.pm-research.com/content/16/4/7.full.pdf}, journal = {The Journal of Fixed Income} }