The pricing of FIREARMs (“Falling Interest Rate Adjustable-Rate Mortgages”)
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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.
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- The pricing of FIREARMs (“Falling Interest Rate Adjustable-Rate Mortgages”)
The Journal of Real Estate Finance and Economics
Volume 6, Issue 3 , pp 251-275
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- Kluwer Academic Publishers
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- Adjustable-rate mortgages
- Non-stationary arbitrage-free binomial term structure model
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- Author Affiliations
- 1. Debt Markets Group, Merrill Lynch & Co., World financial Center, North Tower, 15th Floor, 10281-1315, New York, NY
- 2. Debt Markets Group, Merrill Lynch & Co., World Financial Center, North Tower, 15th Floor, 10281-1315, New York, NY
- 3. College and Graduate School of Business, University of Texas, 78712-1179, Austin, TX