The Pricing of FIREARMs ("Falling Interest Rate Adjustable-Rate Mortgages")

Bjorn Flesaker and Ehud I Ronn

The Journal of Real Estate Finance and Economics, 1993, vol. 6, issue 3, 75 pages

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 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. Copyright 1993 by Kluwer Academic Publishers

Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jrefec:v:6:y:1993:i:3:p:251-75

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