Duration and the price behavior of fixed-rate level payment mortgages: An analytical investigation |
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| Authors: | Paul J Haensly Thomas M Springer Neil G Waller |
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| Institution: | (1) Department of Finance, College of Business Administration, University of North Texas, P.O. Box 13677, 76203-3677 Denton, TX;(2) Department of Finance and Real Estate, College of Business, Florida Atlantic university, 220 SE 2nd Avenue, 33301 Fort Lauderdale, FL;(3) Department of Finance, College of Commerce and Industry, Clemson University, 314 Sirrine Hall, 29634-1323 Clemson, SC |
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| Abstract: | In this research we use a continuous payment formula for duration to examine the price behavior of a fixed-rate level payment mortgage. In the case where the mortgage is held to maturity, duration increases monotonically as term-to-maturity increases, regardless of changes in the market rate of interest. In the case where the mortgage is prepaid prior to maturity, there exists a unique market interest rate below which duration is a monotonically increasing function of time of prepayment, but above which duration has a global maximum at some time of prepayment prior to the term-to-maturity. |
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| Keywords: | Duration mortgage mortgage price behavior |
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