Journal of Real Estate Finance and Economics, Vol. 1, pp. 163-184 (1988)
Abstract
A simulation method is employed to value Adjustable Rate Mortgages, (ARMS). It is used to price two typical instruments: an ARM linked to a Treasury interest rate and an ARM linked to a ``Cost of Funds'' Index. Contractual provisions such as the margin over the index, caps and floors on the ARM's rate or on the monthly prepayment, reset frequency, and the ``teaser'' rate are examined for their influence on value. The effects of interest rate trend and volatility are also analysed.