The Borrower's Choice between Fixed and Adjustable Rate Loan Contracts |
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| Authors: | Donald J. Smith |
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| Affiliation: | Department of Finance and Economics, School of Management, Boston University, 704 Commonwealth Avenue, Boston, Massachusetts 02215. |
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| Abstract: | Previous research indicates that key variables in the choice between fixed and price index-linked debt are the covariances between inflation and real income and between inflation and the real value of the asset financed by the debt. This model extends those results to adjustable rate loan contracts and examines the impact of covariance between the real interest rate and, in turn, real income and real asset values. Positive (negative) covariance between those terms shifts preference toward the adjustable (fixed) loan contract. |
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