The Wharton School, University of Pennsylvania. An earlier version of this paper was presented at the European Finance Association 1982 Annual Meetings. The author would like to thank M. Flannery, M. Smirlock, R. Startz, A. Saunders, and a referee for valuable assistance.
Fixed Versus Variable Rate Loans
Article first published online: 30 APR 2012
1983 The American Finance Association
The Journal of Finance
Volume 38, Issue 5, pages 1363–1380, December 1983
How to Cite
SANTOMERO, A. M. (1983), Fixed Versus Variable Rate Loans. The Journal of Finance, 38: 1363–1380. doi: 10.1111/j.1540-6261.1983.tb03829.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper discusses the nature of fixed and variable loan contracts and derives the conditions which determine the optimal quantity of each. The results indicate that the payoff functions are quite different and dependent upon the project financed. The appropriate conditions for the allocation of loan terms to a set of borrowers are then developed. Finally, the analysis derives the optimal portfolio frontier and risk-return trade-off for the banking firm. Here, it is demonstrated that the solution is unlikely to be at a point of zero interest rate risk.