Reference no: EM132478159

Increased volatility in the market value (price) of a property clearly imposes risk on both the equity holder and the debtholder(s) by directly affecting the values of their respective claims on that value. Assume the mortgage used to finance the purchase of the property matures at this future date with a balance of F required to be paid at that date, where

V11< F < V12

a) If no costs other than the loss of his property are imposed on the equity holder if and when he causes a foreclosure by defaulting on the servicing of his mortgage, do both equity holders and debtholders prefer more or less price volatility or do they have different attitudes towards such volatility?

b) If they have different attitudes, state and explain which one would prefer less volatility and which one more volatility?