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

  • Bjorn Flesaker
  • Ehud I. Ronn
Article

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 mortgages Non-stationary arbitrage-free binomial term structure model 

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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

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