26-33 The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

Question

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The call option held by the residential mortgage holder gives them the right to prepay their mortgage at any time, and it is in the money when market interest rates are lower than the interest rate on their existing mortgage. This allows them to refinance at a lower rate and save money on interest payments.

26-33 the Call Option Held by the Residential Mortgage Holder