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Duration and the Price Behavior of Fixed-Rate Level Payment Mortgages: An Analytical Investigation

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  • Haensly, Paul J
  • Springer, Thomas M
  • Waller, Neil G

Abstract

In this research we use a continuous payment formula for duration to examine the price behavior of a fixed-rate level of payment mortgage. In the case where the mortgage is held to maturity, duration increases monotonically as term-to-maturity increases, regardless of changes in the market rate of interest. In the case where the mortgage is prepaid prior to maturity, there exists a unique market interest rate below which duration is a monotonically increasing function of time of prepayment, but above which duration has a global maximum at some time of prepayment prior to the term-to-maturity. Copyright 1993 by Kluwer Academic Publishers

Suggested Citation

  • Haensly, Paul J & Springer, Thomas M & Waller, Neil G, 1993. "Duration and the Price Behavior of Fixed-Rate Level Payment Mortgages: An Analytical Investigation," The Journal of Real Estate Finance and Economics, Springer, vol. 6(2), pages 157-166, March.
    • Handle: RePEc:kap:jrefec:v:6:y:1993:i:2:p:157-66
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    Cited by:

    1. Shu Ling Chiang & Ming Shann Tsai & Shan Jiang, 2021. "The Influences of Foreclosure Factors on the Value, Yield, Duration and Convexity of a Mortgage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 361-394, September.
    2. Tsai, Ming-Shann & Liao, Szu-Lang & Chiang, Shu-Ling, 2009. "Analyzing yield, duration and convexity of mortgage loans under prepayment and default risks," Journal of Housing Economics, Elsevier, vol. 18(2), pages 92-103, June.
    3. Raymond Chiang & Thomas F. Gosnell & Andrea J. Heuson, 1997. "Evaluating the Interest-Rate Risk of Adjustable-Rate Mortgage Loans," Journal of Real Estate Research, American Real Estate Society, vol. 13(1), pages 77-94.
    4. Followill, Richard, 1998. "An analytical comparison of the durations and price sensitivities of fixed-rate, constant payment and constant amortization mortgages," International Review of Financial Analysis, Elsevier, vol. 7(1), pages 51-64.
    5. Stephen F. Thode, 2000. "CMOs, Duration Risk and a New Mortgage," Journal of Real Estate Research, American Real Estate Society, vol. 19(1), pages 73-103.

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