Abstract
AbstractThere is a well-recognized need for a mortgage instrument that will operate satisfactorily in the presence of a volatile inflation. This paper analyses a large class of mortgages—the ‘continuous mortgage’ (CM)—as a basis for such design. In particular, it is shown that the real (inflation-adjusted) payment stream is exponentially sensitive to changes in the real interest rate. Consequently to realize a satisfactory design, the mortgage must be indexed by assigning the real interest rate. Then, under appropriate restraints, the CM offers a continuum of satisfactory mortgage designs.
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Schedule a callMore From: The Journal of the Australian Mathematical Society. Series B. Applied Mathematics
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