Valuation of the Prepayment Option of a Perpetual Corporate Loan

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<g transform="matrix(.017,-0,0,-.017,41.262,16.412)"><path d="M95 130q31 0 61 -30t30 -78q0 -53 -38 -87.5t-93 -51.5l-11 29q77 31 77 85q0 26 -17.5 43t-44.5 24q-4 0 -8.5 6.5t-4.5 17.5q0 18 15 30t34 12z" id="x2C"></path></g>
<g transform="matrix(1.25,0,0,-1.25,90,90)">
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</g>
<g transform="matrix(.017,-0,0,-.017,47.962,16.412)"><path d="M775 650l-6 -28q-60 -6 -81.5 -16t-61.5 -54l-175 -191l125 -243q30 -58 48.5 -71t82.5 -19l-5 -28h-275l7 28l35 4q31 4 37 12t-6 34l-108 216q-140 -165 -177 -219q-16 -22 -10.5 -30.5t41.5 -13.5l22 -3l-7 -28h-244l8 28q52 4 75 15.5t67 52.5q48 46 206 231
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<g transform="matrix(.017,-0,0,-.017,67.762,16.412)"><path d="M275 270q0 -296 -211 -440l-19 23q75 62 116.5 174t41.5 243t-42 243t-116 173l19 24q211 -144 211 -440z" id="x29"></path></g>
</svg> as a function of the exercise boundary <svg height="11.425" id="M521" style="vertical-align:-0.0pt" version="1.1" viewbox="0 0 11.7875 11.425" width="11.7875" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,11.363)"><path d="M671 0h-247v28q49 7 60 18.5t0 45.5l-155 438h-2q-21 -61 -74 -204.5t-75 -210.5q-15 -51 -4.5 -65t67.5 -22v-28h-221v28q50 9 69 26.5t45 84.5l202 517l32 9l194 -535q23 -61 42 -78.5t67 -23.5v-28z" id="x39B"></path></g>
</svg>; this allows to find the optimal (<svg height="17.825001" id="M522" style="vertical-align:-3.27605pt" version="1.1" viewbox="0 0 89.724998 17.825001" width="89.724998" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,13.688)"><path d="M671 0h-247v28q49 7 60 18.5t0 45.5l-155 438h-2q-21 -61 -74 -204.5t-75 -210.5q-15 -51 -4.5 -65t67.5 -22v-28h-221v28q50 9 69 26.5t45 84.5l202 517l32 9l194 -535q23 -61 42 -78.5t67 -23.5v-28z" id="x39B"></path></g>
<g transform="matrix(.012,-0,0,-.012,11.725,5.525)"><path d="M471 153q-22 -15 -61 -13q-25 31 -45.5 49.5t-56.5 41.5q4 -71 28 -134q-17 -33 -42 -46q-24 12 -42 46q24 63 28 134q-36 -23 -56.5 -41.5t-45.5 -49.5q-36 -2 -61 13q0 28 19 59q65 10 130 43q-65 33 -130 43q-19 31 -19 59q22 15 61 13q25 -31 45.5 -49.5t56.5 -41.5
q-4 71 -28 134q17 33 42 46q24 -12 42 -46q-24 -63 -28 -134q36 23 56.5 41.5t45.5 49.5q36 2 61 -13q0 -28 -19 -59q-65 -10 -130 -43q65 -33 130 -43q19 -31 19 -59z" id="x2217"></path></g><g transform="matrix(.012,-0,0,-.012,11.725,17.763)"><path d="M384 0h-275v27q67 5 81.5 18.5t14.5 68.5v385q0 38 -7.5 47.5t-40.5 10.5l-48 2v24q85 15 178 52v-521q0 -55 14.5 -68.5t82.5 -18.5v-27z" id="x31"></path></g>
<g transform="matrix(.017,-0,0,-.017,24.05,13.688)"><path d="M535 323h-483v50h483v-50zM535 138h-483v50h483v-50z" id="x3D"></path></g><g transform="matrix(.017,-0,0,-.017,38.737,13.688)"><path d="M384 0h-275v27q67 5 81.5 18.5t14.5 68.5v385q0 38 -7.5 47.5t-40.5 10.5l-48 2v24q85 15 178 52v-521q0 -55 14.5 -68.5t82.5 -18.5v-27z" id="x31"></path></g><g transform="matrix(.017,-0,0,-.017,46.896,13.688)"><path d="M412 140l28 -9q0 -2 -35 -131h-373v23q112 112 161 170q59 70 92 127t33 115q0 63 -31 98t-86 35q-75 0 -137 -93l-22 20l57 81q55 59 135 59q69 0 118.5 -46.5t49.5 -122.5q0 -62 -29.5 -114t-102.5 -130l-141 -149h186q42 0 58.5 10.5t38.5 56.5z" id="x32"></path></g><g transform="matrix(.017,-0,0,-.017,55.056,13.688)"><path d="M384 0h-275v27q67 5 81.5 18.5t14.5 68.5v385q0 38 -7.5 47.5t-40.5 10.5l-48 2v24q85 15 178 52v-521q0 -55 14.5 -68.5t82.5 -18.5v-27z" id="x31"></path></g><g transform="matrix(.017,-0,0,-.017,66.054,13.688)"><path d="M152 404l81 35q23 10 41 10q81 0 139 -61.5t58 -149.5q0 -107 -74.5 -178.5t-176.5 -71.5q-71 0 -147 36v555q0 48 -9.5 59.5t-56.5 15.5v23q79 10 145 35v-308zM152 374v-258q0 -20 6 -35q7 -19 30 -37t58 -18q63 0 99.5 50t36.5 137q0 82 -43.5 131t-108.5 49
q-44 0 -78 -19z" id="x62"></path></g><g transform="matrix(.017,-0,0,-.017,74.519,13.688)"><path d="M169 380l92 53q26 16 49 16q80 0 128.5 -56t48.5 -133q0 -108 -72.5 -180.5t-176.5 -91.5q-38 1 -69 18v-131q0 -57 13 -70t71 -18v-27h-236v27q49 5 61 17t12 61v452q0 48 -9.5 58.5t-56.5 16.5v24q66 11 145 43v-79zM169 346v-270q37 -39 94 -39q63 0 101.5 50
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</svg>, <svg height="17.825001" id="M523" style="vertical-align:-3.27605pt" version="1.1" viewbox="0 0 46.974998 17.825001" width="46.974998" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,13.688)"><path d="M671 0h-247v28q49 7 60 18.5t0 45.5l-155 438h-2q-21 -61 -74 -204.5t-75 -210.5q-15 -51 -4.5 -65t67.5 -22v-28h-221v28q50 9 69 26.5t45 84.5l202 517l32 9l194 -535q23 -61 42 -78.5t67 -23.5v-28z" id="x39B"></path></g>
<g transform="matrix(.012,-0,0,-.012,11.725,5.525)"><path d="M471 153q-22 -15 -61 -13q-25 31 -45.5 49.5t-56.5 41.5q4 -71 28 -134q-17 -33 -42 -46q-24 12 -42 46q24 63 28 134q-36 -23 -56.5 -41.5t-45.5 -49.5q-36 -2 -61 13q0 28 19 59q65 10 130 43q-65 33 -130 43q-19 31 -19 59q22 15 61 13q25 -31 45.5 -49.5t56.5 -41.5
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<g transform="matrix(.017,-0,0,-.017,24.05,13.688)"><path d="M535 323h-483v50h483v-50zM535 138h-483v50h483v-50z" id="x3D"></path></g><g transform="matrix(.017,-0,0,-.017,38.737,13.688)"><path d="M241 635q53 0 94 -28.5t63.5 -76t33.5 -102.5t11 -116q0 -58 -11 -112.5t-34 -103.5t-63.5 -78.5t-94.5 -29.5t-95 28t-64.5 75t-34.5 102.5t-11 118.5q0 58 11.5 112.5t34.5 103t64.5 78t95.5 29.5zM238 602q-32 0 -55.5 -25t-35.5 -68t-17.5 -91t-5.5 -105
q0 -76 10 -138.5t37 -107.5t69 -45q32 0 55.5 25t35.5 68.5t17.5 91.5t5.5 105t-5.5 105.5t-18 92t-36 68t-56.5 24.5z" id="x30"></path></g>
</svg>) that maximizes the option price.</table>

Abstract and Applied Analysis

Valuation of the Prepayment Option of a Perpetual Corporate Loan

Figure 7