Amortization method with stochastic indexation of the outstanding principal

Abstract

In this paper we present a model of a debt's amortization with stochastic indexation of the outstanding principal. We first introduce a stochastic differential equation which allow us to define the inflation and deflation process. Then we use these concepts to present a new method of redemption quota calculation, based on the equality between backward outstanding principal and conditional expectation of the forward outstanding principal. Finally numerical examples illustrate the model.