Financial Risk Manager Part 1

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Explanation:

The value of the prepayment option is the difference between:

the value of the mortgage cash flows discounted at the non-option yield of 5.0%, and
the original loan principal of $100,000.

Using the 6.0% mortgage payment stream and discounting at 5.0% gives a value of about $111,685. Therefore:

\text{Prepayment option value} = 111{,}685 - 100{,}000 = 11{,}685

So the correct answer is $11,685.

Explanation:

The value of the prepayment option is the difference between:

the value of the mortgage cash flows discounted at the non-option yield of 5.0%, and
the original loan principal of $100,000.

Using the 6.0% mortgage payment stream and discounting at 5.0% gives a value of about $111,685. Therefore:

\text{Prepayment option value} = 111{,}685 - 100{,}000 = 11{,}685

So the correct answer is $11,685.

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MManit

Last updated: April 18, 2026 at 11:32

$5,685

50.0%

$10,285

50.0%

$11,685

$16,385