Mortgages and Markov chains: A simplified evaluation model

This paper has two purposes. The first is purely expository: to introduce stochastic interest-rate models and security-evaluation methods in a simple mathematical setting. Specifically, it assumes the uncertainties in the model are represented by a discrete-time, finite-state Markov chain. Second, using this framework, the paper presents a relatively simple model for the evalaution of mortgage-backed securities.