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

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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.

Document Type: Research Article


Affiliations: Graduate School of Management, Ming Chuan University, Taipei, 105, Taiwan

Publication date: 2007-05-01

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