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On a class of adjustable rate mortgage loans subject to a strict balance principle

  • Jensen, Bjarne Astrup

    (Department of Finance, Copenhagen Business School)

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    We describe the background and the basic funding mechanisms for the type of adjustable rate mortgage loans that were introduced in the Danish market in 1996. Each loan is funded separately by tap issuing pass-through mortgage bonds (“strict balance principle). The novelty is a funding mechanism that uses a roll-over strategy, where long term loans are funded by sequentially issuing short term pass-through bonds, and the first issuer of these loans obtained a patent on the funding principles in 1999. Publicly available descriptions of the principles leave an impression of very complicated numerical algorithms. The algorithms described here show that the essentials can be reduced to a “back of an envelope" complexity.

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    Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2004-11.

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    Length: 37 pages
    Date of creation: 07 Jan 2005
    Date of revision:
    Handle: RePEc:hhs:cbsfin:2004_011
    Contact details of provider: Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
    Phone: +45 3815 3815
    Web page:

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    1. John Y. Campbell & Joao F. Cocco, 2002. "Household Risk Management and Optimal Mortgage Choice," Harvard Institute of Economic Research Working Papers 1946, Harvard - Institute of Economic Research.
    2. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
    3. Allen Frankel & Jacob Gyntelberg & Kristian Kjeldsen & Mattias Persson, 2004. "The Danish mortgage market," BIS Quarterly Review, Bank for International Settlements, March.
    4. Christiansen, Charlotte & Engsted, Tom & Jakobsen, Svend & Tanggaard, Carsten, 2003. "Denmark - A chapter on the Danish Bond Market," Finance Working Papers 03-3, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    5. Marjorie Flavin & Takashi Yamashita, 2002. "Owner-Occupied Housing and the Composition of the Household Portfolio," American Economic Review, American Economic Association, vol. 92(1), pages 345-362, March.
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