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Department of Finance, Copenhagen Business School Working Paper Series, Department of Finance, Copenhagen Business School

No 2004-11:
On a class of adjustable rate mortgage loans subject to a strict balance principle

Bjarne Astrup Jensen

Abstract: We describe the background and the basic funding mechanisms for the type of adjustable rate mortgage loans that were introduced in the Danish market in 1996. Each loan is funded separately by tap issuing pass-through mortgage bonds (“strict balance principle). The novelty is a funding mechanism that uses a roll-over strategy, where long term loans are funded by sequentially issuing short term pass-through bonds, and the first issuer of these loans obtained a patent on the funding principles in 1999. Publicly available descriptions of the principles leave an impression of very complicated numerical algorithms. The algorithms described here show that the essentials can be reduced to a “back of an envelope" complexity.

Keywords: Adjustable rate mortgages; balance principle; patent; yield curve riding; (follow links to similar papers)

JEL-Codes: C63; G21; (follow links to similar papers)

37 pages, January 7, 2005

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