TY  - JOUR
AU  - Buser,Stephen A.
AU  - Hendershott,Patric H.
AU  - Sanders,Anthony B.
TI  - Pricing Rate Caps on Default-Free Adjustable-Rate Mortgages
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1525
PY  - 1984
Y2  - December 1984
UR  - http://www.nber.org/papers/w1525
L1  - http://www.nber.org/papers/w1525.pdf
N1  - Author contact info:
Patric H. Hendershott
Fisher Hall
Ohio State University
2100 Neil Avenue
Columbus, OH 43210
Tel: 218/963-1393
Fax: 218/963-9484
E-Mail: hendershott.2@osu.edu
AB  - A model is developed and utilized in this paper to value a life of loan interest rate cap on an ARM that reprices monthly. The value of the cap is seen to depend importantly on both the slope of the term structure and the variance of the one month rate. However, the cap value is not sensitive to the source of the slope of the term structure -- what precise combination of interest rate expectations and risk aversion determined the slope. This insensitivity is fortunate because of the great difficulty of knowing at any point in time why the term structure is what it is. Given the variation in the slope of the term structure and the variance of the one month rate that occurred over the 1979-84 period, the addition to the coupon rate on a one-month ARM that lenders should have charged for a 5 percent life of loan cap has ranged from 5 to 40 basis points.
ER  -