Hi guys, I have questions on Surrender penalties and Prepayment penalties (pg 86 on Book6 the table)
First, under what kind of interest rate environment will the above situations happen?
For Prepayment, I know when interest rate is low, homeowners will prepay,
For Surrender penalty, when will the policy holder of the insurance policy prepay? The book seems to suggest it happen when interest rate is rising. I don’t quite understand.
Secondly, the book said Prepayment penalty will increase the correlation of A&L
and Surrender penalty will lower standard deviation of the liability.
I cannot quite figure out why. Can someone help? Many thanks!