Federal Home Loan Bank of Atlanta, Atlanta, Georgia. The author would like to thank Jim McNulty and Bob Sapp for helpful suggestions on an earlier draft of this paper and Marsha Kaplan for statistical assistance. The views in this article are those of the author and do not necessarily reflect those of the Federal Home Loan Bank of Atlanta.
The Duration of an Adjustable-Rate Mortgage and the Impact of the Index
Article first published online: 30 APR 2012
1986 The American Finance Association
The Journal of Finance
Volume 41, Issue 4, pages 923–933, September 1986
How to Cite
OTT, R. A. (1986), The Duration of an Adjustable-Rate Mortgage and the Impact of the Index. The Journal of Finance, 41: 923–933. doi: 10.1111/j.1540-6261.1986.tb04557.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
With the increasing use of adjustable-rate mortgages for asset/liability management, there exists the need to properly evaluate their price sensitivity to interest rate changes. This paper provides a foundation by deriving the duration of an adjustable-rate mortgage. The properties of this duration are unique and have some important differences from those of fixed-rate securities. One important characteristic of an adjustable-rate mortgage concerns the index used to adjust the mortgage rate. It was found that the index tended to be more important than the adjustment frequency in determining the duration of an adjustable-rate mortgage.