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The Borrower's Choice between Fixed and Adjustable Rate Loan Contracts
Author(s) -
Smith Donald J.
Publication year - 1987
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00422
Subject(s) - economics , inflation (cosmology) , fixed interest rate loan , loan , floating interest rate , covariance , debt , econometrics , real interest rate , asset (computer security) , interest rate , value (mathematics) , index (typography) , fixed asset , monetary economics , financial economics , microeconomics , macroeconomics , mathematics , production (economics) , statistics , physics , computer security , theoretical physics , computer science , world wide web
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.