Valuation of adjustable rate mortgages with automatic stretching maturity
نویسندگان
چکیده
In Hong Kong, 35% of residential mortgage loans are adjustable rate mortgages with variable tenor (VRT). That is, with a change in interest rates, the loan adjusts its maturity and principal payment such that the monthly installment remains the same. In other words, instead of bearing a volatility on monthly payments as in a ®xed-tenor variable payment (VRP) mortgage, VRT mortgagors bear interest rate risk by bearing a tenor risk. In this paper, we analyze the valuation of this type of mortgages and the results are compared with the conventional VRP mortgages. We ®nd VRT loans are less expensive from a borrower's perspective than VRP loans, but the dierence between the loans becomes less signi®cant if a tenor cap is added to the VRT loan. Ó 2000 Elsevier Science B.V. All rights reserved. JEL classi®cation: G21
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