CMOs, Duration Risk and a New Mortgage
AbstractThis article presents an alternative mortgage that retains the fixed-rate feature of a fixed-rate mortgage (FRM), but accelerates the principal amortization when interest rates rise, exposing the buyer to less duration risk in a rising interest rate environment. This mortgage, labeled the adjustable amortization mortgage (AAM), is shown to have lessened interest rate risk for the buyer as well as lower default risk, suggesting that it should be priced higher (at a lower rate of interest) than the typical FRM. It is also shown that mortgage-backed securities collateralized by an AAM have much less price volatility than mortgage-backed securities backed by FRMs.
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Bibliographic InfoArticle provided by American Real Estate Society in its journal Journal of Real Estate Research.
Volume (Year): 19 (2000)
Issue (Month): 1 ()
Contact details of provider:
Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
Find related papers by JEL classification:
- L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
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- Anderson, Gary A & Barber, Joel R & Chang, Chun-Hao, 1993. "Prepayment Risk and the Duration of Default-Free Mortgage-Backed Securities," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 16(1), pages 1-9, Spring.
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