The Journal of Real Estate Finance and Economics

, Volume 6, Issue 3, pp 251–275

The pricing of FIREARMs (“Falling Interest Rate Adjustable-Rate Mortgages”)

  • Bjorn Flesaker
  • Ehud I. Ronn
Article

DOI: 10.1007/BF01096961

Cite this article as:
Flesaker, B. & Ronn, E.I. J Real Estate Finan Econ (1993) 6: 251. doi:10.1007/BF01096961

Abstract

The purpose of this article is to propose and price a new type of adjustable-rate mortgage: the FIREARM (“Falling Interest Rate Adjustable-Rate Mortgage”). The interest payments on this mortgage adjust downward whenever interest rates decline, while remaining stable when interest rates increase. The FIREARM is alternatively priced as a prepayable and non-prepayable mortgage with a spread over the short-term interest rate. We price these two instruments and contrast their prices with those of fixed-rate mortgages using the parsimonious assumptions of a non-stationary arbitrage-free binomial term structure model.

Key words

Adjustable-rate mortgagesNon-stationary arbitrage-free binomial term structure model

Copyright information

© Kluwer Academic Publishers 1993

Authors and Affiliations

  • Bjorn Flesaker
    • 1
  • Ehud I. Ronn
    • 2
    • 3
  1. 1.Debt Markets Group, Merrill Lynch & Co.World financial CenterNew York
  2. 2.Debt Markets Group, Merrill Lynch & Co.World Financial CenterNew York
  3. 3.College and Graduate School of BusinessUniversity of TexasAustin