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We analyse an incentive contracting model of partnership formation between heterogeneous investors and entrepreneurs. Partnerships are subject to double‐sided moral hazard problems in entrepreneurial action and monitoring by investors. Greater monitoring ability implies stronger incentives to monitor. On the other hand, low‐collateral borrowers have lower inside equity participation. Hence the incentive problem is best mitigated by assigning low‐collateralized entrepreneurs to high‐ability investors following a negative assortative matching pattern. Moreover, negative assortative matching implies that the equilibrium loan rate is in general non‐monotonic in borrower collateral. Finally, our model sheds light on how changes in the inequality of collateral distribution affect the cost of external borrowing. [ABSTRACT FROM AUTHOR]

The article discusses the benefits and drawbacks of both fixed and adjustable rate mortgages. Scholars have frequently thought that consumer lay in one of two groups, the first being that the consumers' characteristics had nothing to do with the mortgage terms that they were given and the other being one where information asymmetry is not an issue and that characteristics are taken into account. The article concludes that the probit discrete choice model uncovered that consumers' mortgage choices were most influenced by price.

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. [ABSTRACT FROM AUTHOR]

Sustained high rate of inflation has led to the creation of debt instruments with variable interest rate. The availability of these debt instruments presents management with the problem of the choice of the optimal debt portfolio. This paper deals with this problem assuming a given, and optimal, debt to equity ratio. Given expected monetary value maximization, an efficient frontier is derived in terms of the expected net income and probability of bankruptcy, where net income is defined as operating income minus debt repayment. This efficient frontier is shown to be also mean-variance efficient. It is also shown that in most cases the optimal debt portfolio includes more than one debt instrument. In other words, the firm will avoid the policy of minimizing the expected cost of its debt repayments or the policy of minimizing the costs of bankruptcy. The optimal solution itself is affected by market variables like the relative expected cost of different debt instruments and by firm specific variables like the variability of its operating income stream, and the covariance between the operating income and the debt repayments. [ABSTRACT FROM AUTHOR]

The 1970s heralded times of rapid and intense inflation accompanied by high and volatile interest rates. While there have been many economic consequences attributable to these factors, perhaps most strongly affected have been the various markets and institutions dealing with fixed income securities. One reaction has been the introduction of variable rate loans. Floating rate corporate notes were first introduced in 1974 when a total of $1.3 billion were sold. Variable rate mortgages probably originated in the 1930s in the United Kingdom and Canada. Until recently they were restricted in this country. In these contracts the interest due is determined by currently prevailing rates and not the rates which were in force at the time of issuance. The purpose of this design is to stabilize the price or value of the contract—immunizing it against changes in interest rates. This paper presents a preliminary analysis of some aspects of variable rate loan contracts. Section II reviews a recently developed pricing model for the term structure of interest rates. Section III begins the discussion on variable rate loans by outlining the construction of various default-free contracts which offer perfect immunization. Section IV discusses some typical modifications found in existing variable rate contracts. In this section the price and risk of these modified contracts are determined in various examples. Finally Section V examines the changes required for variable rate contracts when there is the risk of default. The 1970s heralded times of rapid and intense inflation accompanied by high and volatile interest rates. While there have been many economic consequences attributable to these factors, perhaps most strongly affected have been the various markets and institutions dealing with fixed income securities. One reaction has been the introduction of variable rate loans. Floating rate corporate notes were first introduced in 1974 when a total of $1.3 billion were sold... [ABSTRACT FROM AUTHOR]

A number of proposals have recently been made to permit the introduction of one or a number of alternative instruments of residential mortgage finance (AMI's) as supplements or replacements for the familiar fixed nominal-interest rate, constant payment mortgage (the FRM). These instruments, it is contended, will prove superior to the FRM in responding to lenders' or borrowers' cash flow requirements, increasing mortgage capital flows, and increasing the level of housing consumption and opportunities for homeownership. One of the major issues which has emerged in connection with such proposals and which is hindering such introduction is the effect AMI's would have on default risk by certain borrower groups, particularly young, elderly, poor, non-upwardly mobile, or black households. An increase in default risk could mean the application of more rigorous underwriting standards by lenders, which would result in increased cost or even denial of mortgage credit to these groups. This study empirically addresses this issue through (1) estimation of a model relating variables associated with the borrower, property, and mortgage instrument to the probability of default over time and (2) simulation of default risk under various alternative instruments, carded out by observing the behavior of the estimated model under alternative mortgage conditions. The data used in estimation are generated through respecification of a default model developed by yon Furstenberg, with explanatory variables recast into terms which are not instrument specific. Simulation under a variety of scenarios of borrower and economic conditions permits a broad assessment of the desirability of each AMI. The study is divided into four sections. First, the theoretical basis for model specification is set forth. Second, the model is estimated, and caveats relating to the strength and interpretation of estimation results are made. Third, the model is used to simulate the impact of the introduction o... [ABSTRACT FROM AUTHOR]

In the paper I shall discuss Stansell and Millar examine the variable rate, variable payment mortgages issued by the Farm Credit Banks. They are concerned with the question of whether adjusting the mortgage payment puts an undue burden on the borrower. To answer this question, an examination is made of how the mortgage payment to mortgagor net income ratio changes over a period of time. The authors conclude that "the variable rate, variable payment mortgage did not constitute an undue burden on the mortgagor." Studying this paper I have found several serious problems, some of a conceptual nature and others of a technical nature concerning the statistical procedures employed. Because of these problems I have serious doubts whether a case has been made that these mortgages do not constitute an undue burden on the mortgagor. My discussion summarizes some of the reasons for these doubts. [ABSTRACT FROM AUTHOR]

The article discusses the equilibrium spread between variable rates and fixed rates on long-term financing instruments. The author states that one of the most important innovations in bond financing and in mortgage lending has been the quick adoption of variable-rate instruments as of December 1973. He explains that notes and bonds which have an interest rate between one and two percentage points above the prime rate are common in corporate financing. The article states that the Federal Home Loan Bank Board endorsed the variable-rate concept and the Federal Home Loan Mortgage Corp. is preparing guidelines for secondary market operations in variable-rate mortgages.

Effective management of variable-rate irrigation (VRI) is a critical factor for maximizing the benefit of a VRI system. In this study, the influences of soil properties on winter wheat and summer maize were studied to verify whether differences in soil available water holding capacity (AWC) had an influence on crop growth parameters, yield, and water productivity (WP). A center-pivot VRI system was employed to deliver irrigation water across the field in an alluvial flood plain in China, and AWC was used to delineate VRI management zones. Three management zones with substantial differences in AWC were created, with AWC varying from 152 to 161 mm, from 161 to 171 mm, and from 171 to 185 mm for zones 1, 2, and 3, respectively. All zones were managed using the same allowed depletion. In the two-year study, the seasonal irrigation amount was basically equivalent among management zones for both winter wheat and summer maize. Differences in crop growth parameters were detected in plant height and leaf area index for winter wheat. The maximum plant height and leaf area index observed in zone 2 were 5 cm and 2.1 greater, respectively, than in the other zones. For both winter wheat and summer maize, the highest yield and WP were observed in zone 2, except for summer maize WP in the 2014 season. Compared with the average value for this field, the yields in zone 2 were 27% and 23% greater for winter wheat and 4% and 11% greater for summer maize in the 2014 and 2015 seasons, respectively. We demonstrate that AWC is an effective parameter for zone identification in VRI management, and differences in AWC and the layered-textural soils in a field may influence the crop growth parameters, yield, and WP of winter wheat and summer maize. [ABSTRACT FROM AUTHOR]

The underlying premise of the Tucker paper is that institutional arrangements must be made, primarily in the form of regulatory changes, such that thrift institutions can be protected from the vagaries of fluctuating interest rates. This view ignores the more fundamental issue of whether it might be desirable to allow the housing sector to continue to play its role as handmaiden to monetary policy by contracting when monetary conditions are tight and expanding when conditions ease. On this issue Gibson (1) has presented rather convincing argument against buffering the housing sector at all. A stronger case should be made for the opposing view, which seems to limit its analysis to the microeconomics of thrift institutions rather than the macroeconomics of the effectiveness of monetary policy. However, the author avoids the issue and chooses to investigate ways in which the maturity differential can be reduced. [ABSTRACT FROM AUTHOR]

Payments of interest amounts in floating rate loans are generally linked to specific reference parameters, such as EURIBOR. Given the decrease of such parameters to reference values around zero, what would happen if such a fall continued below this value (so that lenders have to pay interest amounts to borrowers)? General principles of interpretation of contracts, good faith and equity, jointly with an analysis of nature / characteristics of loan contracts could help to find a solution being the most transnational possible. In particular, reference could be made to: (i) an interpretation of the loan contract by which such contract cannot betray its nature (and interest payments are necessary in non-gratuitous loans); (ii) the equity principle, under which contracts have to be reasonable / fair (and lenders should receive back by borrowers at least the capital amount); (iii) the nature of loans as contracts necessarily requiring interest payments by borrowers. [ABSTRACT FROM AUTHOR]

A common situation is where a borrower is offered the choice of two types of loans—a fixed interest rate loan for a fixed period or a variable interest (floating interest) rate loan. Usual wisdom and advice is that the borrower opts for the fixed rate loan if interest rates are anticipated to rise in the future or opts for the variable rate loan if interest rates are anticipated to fall. However, depending on the magnitude of the rates offered, and the rate uncertainty in the market, such wisdom may not always be well founded. This note demonstrates why this might be. It derives a readily usable, low-mathematical-background expression showing, for borrowers, when fixed and variable rate loans are equivalent and when one rate type is better/worse than the other. [ABSTRACT FROM AUTHOR]

The article presents a case study of Northeastern University's campaign to raise 65 million dollars to refinance previously issued Auction Rate Securities (ARS) and the renovation of classroom buildings. Topics discussed include several fundraising alternatives that were considered including the issuance of variable rate bonds. Also discussed are the university's financing history and the role of the Massachusetts Health and Educational Facilities Authority in the fundraising campaign.

This study investigates the effects of economy-wide corruption on bad loans across a large sample of countries. The evidence reveals that greater corruption is associated with more bad loans. Loan defaults are lower in faster growing economies, in economies with higher lending rates and in nations in the Euro zone, ceteris paribus. However, other institutional controls, including central bank autonomy, financial underdevelopment, bank-based economies and transition nations fail to show appreciable effects on the incidence of bad loans. The findings are robust to an alternate corruption measure and to endogeneity of corruption. Policy implications are discussed. [ABSTRACT FROM AUTHOR]

This study adds to an emerging literature on the lending practices of mortgage brokers during the run-up in home prices prior to 2006. Following a sample of low- and moderate-income borrowers through the first years following home purchase, the analysis identifies differences in the refinancing transaction associated with the use of mortgage brokers vs. retail lenders. Specifically, the analysis includes measures of the refinancing process, including whether the lender initiated contact with the borrower, whether the terms of the mortgage changed at closing, and the level of borrower satisfaction in hindsight. Care must be taken in extrapolating from this sample to the broader mortgage market, as all borrowers refinanced out of 30-year fixed-rate purchase mortgages in the Community Advantage Program (CAP). Nevertheless, analysis of this sample offers unique insight into borrowers' interactions with mortgage brokers during the refinancing transaction. Origination with a mortgage broker, compared with origination through a retail lender, is associated with both a less satisfactory refinancing process and a higher likelihood of refinancing into an adjustable-rate mortgage (ARM). [ABSTRACT FROM AUTHOR]

Various states and other local jurisdictions have enacted laws intending to reduce predatory and abusive lending in the subprime mortgage market. These laws have created substantial geographic variation in the regulation of mortgage credit. This article examines whether these laws are associated with a higher or lower cost of credit. Empirical results indicate that the laws are associated with at most a modest increase in cost. However, the impact depends on the product type. In particular, loans with fixed (adjustable) rates are associated with a modest increase (decrease) in cost. [ABSTRACT FROM AUTHOR]

This article discusses the economic aspects of civil society of Great Britain. The financial revolution of the 1690s had inaugurated an experiment in public credit that began to shift the ground of England's prosperity and power from land to liquidity, from fixed assets to floating rates, from past experience to an imagined future in which the confidence of bondholders, the expectations of fund managers, and the projections of speculators would become decisive. Alongside the "revolution in property" grew another "revolution" in the propensity to consume.

Examines the risks and benefits of variable-rate (VR) debt and the risk-minimizing tools available to governmental issuers of VR debt. Four basic characteristics of variable-rate demand notes; Discussion on VR debt management policy; Alternative methods for alleviating budgetary risk; Conclusion.

Analyzes the variable rate demand obligations (VRDO) for issuers of water and sewer debt. Definition of VRDO; Components of the structure of VRDO; Discussion of interest rate adjustments; Factors to consider before using VRDO.

The purpose of this article is threefold. First, it rein-forces an argument made by Benjamin Esty in the Spring 1999 issue of the Journal of Project Finance that variable discount rates should be used for the valuation of projects because both leverage and business risk change over the course of the project. Second, the author argues for discounting equity cash flow at the cost of equity rather than discounting free cash flow at the weighted-average cost of capital. Third, she disputes the traditional wisdom that leverage should be measured in market value terms and offers simpler-to-compute notional book debt ratios as an alternative. [ABSTRACT FROM AUTHOR]

Compares the features of capital notes with other types of debt securities to obtain an estimate of prices if capital notes are to be issued. Concerns of investors in capital notes; Rate on capital notes; Similarity of capital notes pricing with corporate and municipal revenue notes.

Looks at the lender litigation issue, wherein the purchaser of a promissory note or any other type of commercial paper that contains a variable interest provision may attain the status of a holder in due course. Article 3 of the UCC; Relevant policies.

The Eleventh District Cost of Funds Index (COFI) is a popular index for pricing adjustable rate mortgages. COR is calculated from the interest expenses incurred by thrifts when raising funds, It is a mixture of current and past interest rates on many different financial instruments. COR can be modelled well with simple econometric models. Commonly used, simple COFI models are compared using a method developed by Hendry (1989). Some of these models, which appear to fit the data veil, have nonrohust parameters, significant serial correlation, and heteroscedastic errors. These poorly specified models may lead to systematic mispricing of COFI mortgages. Once a robust econometric model is chose, the lagged adjustment of COF1 to movements in interest rates can be incorporated into mortgage pricing models. [ABSTRACT FROM AUTHOR]

Focuses on the index of variable rate loans in the United States. Conditions under the loan contract with provision for a successor index; Definition of an acceptable successor index; Decision on the conflict over successor index between lender and borrower.

Focuses on the expansion of variable rate on credit market. Removal of rate controls on savings accounts; Problems on the fluctuations in the cost of funds; Incorporation of demand features on loan contracts.

This paper evaluates the interest-rate risk inherent in an adjustable-rate mortgage (ARM) with sporadic rate adjustments and possibly binding periodic and life-of-loan rate change constraints. Simulation analysis forecasts ARM cash flows, determines the probability that constraints will hold, and partitions the loan into fixed and variable components. Simulation parameters are then altered to measure the impact of changes in contract terms and market conditions on the interest-rate risk of a typical ARM loan. Interest-rate sensitivity is found to be significantly less than that of fixed-rate loans and remarkably insensitive to changes in loan margins or initial loan rates after the first few years of an ARM's life. Therefore, it is not surprising that lenders have used these features to lure borrowers to ARM's. Periodic rate change limits and volatility in the underlying index are the only factors that influence the interest-rate risk of an existing ARM in a substantive way. [ABSTRACT FROM AUTHOR]

The article highlights that the interest rate risk borne by financial institutions has increased markedly as the credit markets have become unstable in recent years. The burden of this new instability has been especially severe for lending institutions whose balance sheets show the greatest mismatch between the maturities of assets and liabilities. The savings and loan industry, for example, which borrows short and lends long, suffered serious losses in recent years as income from its portfolio of old mortgages failed to keep pace with the escalating cost of short-term funds. The specter of such losses has led to the emergence of adjustable rate mortgages (ARM) as well as other types of variable rate contracts. These contracts often specify a complex functional relationship between the future loan interest rate and the lender's future cost of funds. In view of the growing popularity of variable-rate loans, the article discusses various aspects of the optimal variable-rate contract, focusing especially on the contractual relationship between the loan rate and the future cost of funds with reference to model of economist Artur Raviv.

The purpose of this study is to provide an econometric characterization of the dynamic interrelationship among structure, conduct and performance variables with a vector autoregressive (VAR) model. Particular attention will be given to the causality and response patterns of the variable involved. In the light of our desire to ascertain descriptive characterizations of historical behaviour, we let the data speak for itself. The result suggests a weak relationship existing between market structure and profitability. [ABSTRACT FROM AUTHOR]

Analyzes the effects of choosing the variable interest rate over the fixed interest rate for agricultural loans on the borrowers, lenders and the agriculture sector in the United States. Factor that makes the variable rates of the Farm Credit Service more stable than that of other lenders; Impact of the shift of the interest rate risk from a lender to a farmer; Reason of a lender for adopting the variable interest rate.

This study uses new data on the rate of prepayment on conventional single-family adjustable-rate mortgages (ARMS) that originated between 1983 and 1966 to determine if ARMs with and without initial year discounts have the same probability of paying off. The new data are from a large national private mortgage insurer in the United States. Each loan is tracked from its origination date through prepayment or the end of 1991. Nonparametric test statistics are used to test for differences in these prepayment rates. The findings suggest that ARMs with initial-year discounts are paid off at a rate that is essentially no different from the rate on otherwise comparable ARMs without initial-year discounts. [ABSTRACT FROM AUTHOR]

This paper concerns the conditions under which borrowers select fixed and adjustable rate mortgages. The novelty of the paper lies in its capability to analyze the effect of nominal and real shocks separately. The fixed rate mortgage (FRM) versus the adjustable rate mortgage (ARM) choice is determined by the expected real interest rate differential, initial wealth, income, expected real and nominal income risk exposure—measured by different parameters—the value of the house, the appreciation of the house and the influence of the variance of nominal and real shocks. Results differ according to whether or not borrowers are restricted by the loan-to-value constraint. [ABSTRACT FROM AUTHOR]

Examines the anticipatory hedge of interest rate and quantity risk in loan commitments. Types of loan commitments used in practice; Aid from financial futures contract in managing the interest rate; Elimination of the variability of unhedged profits through T-bill futures hedging.