The Allocation of Risk: Some Implications of Fixed versus Index-Linked Mortgages

Jerome B. Baesel and Nahum Biger

Journal of Financial and Quantitative Analysis, 1980, vol. 15, issue 2, 457-468

Abstract: Whether borrowers or lenders gain or lose due to inflation depends upon the nominal rate agreed to, the realized inflation rate and their inflationary expectations when the contract was written. The high rate of inflation in recent years has resulted in the real interest rates on traditional, fixed–rate mortgages being substantially below the nominal, contract rate. This recent experience has stimulated borrowers and lenders to consider the implications of inflation in their contract negotiations.

Date: 1980
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