Corporate loans priced based on risk and liquidity, impacting borrower refinancing decisions.
The article explores how banks price corporate loans based on factors like credit risk, liquidity cost, and prepayment options. The main focus is on the prepayment option, where borrowers can pay off their loan early. Banks face reinvestment risk if borrowers choose to repay early. The study uses a mathematical model to price loans and prepayment options, focusing on solving equations instead of using time-consuming methods like binomial trees or Monte Carlo techniques.