Pricing Upward-Only Adjusting Leases

This paper presents a stochastic pricing model of a unique, path-dependent lease instrument common in the United Kingdom and numerous commonwealth countries, the upward-only adjusting lease. In this lease, the rental rate is fixed at lease commencement but will be reset to the market rate at predetermined intervals (usually every five years) if it exceeds the contract rent. We derive a closed form expression for the market rent of a lease with upward-only adjustments. Results indicate what the initial coupon rate on a 10-year lease with one reset should be relative to that on a symmetric up-and-downward adjusting variable rate lease under various economic conditions (level of real interest rates and expected drift and volatility of the underlying rental service flow). We also consider the calculation of effective rents when free rent periods are given.     

Prepayment Risk in Adjustable Rate Mortgages Subject to Initial Year Discounts: Some New Evidence

This paper uses microlevel data to examine recent prepayment performance of adjustable rate mortgages (ARMs) employing the competing risk methodology developed by Deng, Quigley and Van Order (2000). We find support for the teaser rate and adjustment date effects implied by the theoretical model of Kau et al. (1993). In addition, we find that teased ARMs bear prepayment risk related to their discount, contrary to results reported by VanderHoff (1996) and Green and Shilling (1997). Finally, and contrary to the usual finding for fixed-rate mortgages, we find that loan age has a negative effect on prepayment risk for ARMs, consistent with the phenomenon that borrowers with high mobility and/or propensity to refinance exit the pool early.     

Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure

Implicit in option-pricing models of mortgage valuation are threshold levels of put-option value that must be crossed to induce borrower default. There has been little research into what these threshold values are that come out of pricing models or how they compare to exercised option values seen in empirical data. This study decomposes boundary conditions for optimal default exercise to look at the economic dynamics that should lead to optimal default timing. Empirical data on FHA insured mortgage foreclosures is then examined to discern the predictive influence of optimal-option-valuation-and-exercise variables on observed default timing and values. Interesting results include a new understanding of how to measure and use property equity variables during economic downturns, house-price index ranges over which default is exercised for various classes of borrowers, and implied differences in appreciation rates between market-price indices and foreclosed properties.     

Improving the productivity of vertisols in the Accra plains of Ghana using leguminous cover crops

The productivity of the Vertisols of the Accra plains is low, in spite of its high potential fertility. This could be attributed to physical constraints and low organic matter content. A study was conducted at the Agricultural Research Centre, Kpong, to assess the suitability of Mucuna pruriens, Mimosa invisa and Stylosanthes guianensis, in short fallows, for improving the fertility, physical properties, moisture conservation and weed control in the case of these soils. Mucuna had the highest biomass of 5.3tha^?1, as opposed to 4.1tha^?1 under natural fallow. The mucuna and stylosanthes biomass had comparatively higher total N values (240.75 and 203.51kgha^?1, respectively) than mimosa and natural fallow (152.46 and 162.74kgha^?1, respectively). Soil organic carbon, one year after the incorporation of cover crops, was found to be relatively higher under the cover crops (mucuna, stylosanthes and mimosa) than it was under natural fallow. Bulk densities were thus lower under the cover crops than they were under natural fallow. Also, soils under the cover crops had higher total porosity, water infiltration rates and moisture storage than they did under natural fallow. Weed cover, 115 days after planting maize, was significantly lower in plots previously under Mucuna pruriens than it was under natural fallow, Stylosanthes guianensis and Mimosa invisa. There was a negative linear correlation between cover crop biomass and weed density (R ² = 0.593–0.805). Grain and stover yields of maize were higher under Mucuna pruriens than they were under natural fallow (138 and 70 per cent higher, respectively). Burning of the natural fallow resulted in greater weed growth than when the material was worked into the soil (41 and 8 per cent, respectively). Grain yield was significantly greater under mucuna than it was under natural fallow (3.1 and 1.3tha^?1, respectively).