Fixed Interest Rate Research Articles

Islāmic Finance Benchmark : A Possible Solution Revisited

Financial Assets’ pricing benchmarks serve multiple purposes in financial markets and hence play a critical role. First, they serve as a reference point for pricing instruments; second, they reflect the opportunity cost and third, they serve as a reference rate for the relative performance of investment portfolios. Hence, a benchmark that is transparent, liquid, easy to calculate and non-manipulative is considered critical for the efficiency of financial markets. Recent scandal of LIBOR’s manipulation by Barclays bank emphasizes the importance of a non-manipulative benchmark. In this paper, we propose an alternative pricing model and show how it could work to serve the purpose of a potential benchmark for pricing. This model was proposed by Abbas Mirakhor (1996) by utilizing the concept of Tobin’s Q to arrive at the cost of capital (CoC) without resorting to fixed interest rate. We have empirically tested the model on Malaysian firms. To arrive at the CoC, we derived Q-ratios at firm level and aggregated the same at the industry level. Our findings suggest that the model proposed by Mirakhor (1996) can be used to estimate CoC in an interest free economy.

A Note on Equivalent Fixed Rate and Variable Rate Loans; Borrower's Perspective

A common situation is where a borrower is offered the choice of two types of loans—a fixed interest rate loan for a fixed period or a variable interest (floating interest) rate loan. Usual wisdom and advice is that the borrower opts for the fixed rate loan if interest rates are anticipated to rise in the future or opts for the variable rate loan if interest rates are anticipated to fall. However, depending on the magnitude of the rates offered, and the rate uncertainty in the market, such wisdom may not always be well founded. This note demonstrates why this might be. It derives a readily usable, low-mathematical-background expression showing, for borrowers, when fixed and variable rate loans are equivalent and when one rate type is better/worse than the other.

Effective factors on the absorption of bank deposits in order to increase the relative share of Isfahan Sepah Bank

The aim of the present study is effective factors on the absorption of bank deposits in order to increase the relative share of Isfahan Sepah Bank. The purpose of this research is applied and in terms of research methods, the branch of the field is descriptive – survey. Data collection and statistical tests using panel data Stationarity test assumptions of classical collinearity regression model, test t, Fisher F test, durbin Watson test was significant, F Lymr personal effects, Hausman test, the variance test anisotropy the remaining residues of Normality review for multiple regression analysis has been used. The research population is consisted of Sepah Bank deposits in the province during the period 1379 to 1389. The results indicate that the effect of e-banking parameters like the relative contribution of POS and ATM on bank deposits is positive and significant. The effect of variable interest rates and money supply is increased relative share of bank deposits. Effects of inflation and other variables such as market shares of competing money market are negative and significant. On the one hand inflation versus fixed interest decreases the value of money; on the other hand, with the boom in the stock market in the contrary to fixed interest rates, money market deposits go toward this bazaar. The effect of production is positive and significant on the share of deposits and has been shown that by increasing production, the relative share of bank deposits will increase. Effect of exchange rates on deposits are negative that indicating by increasing the relative contribution of the exchange rate, the discounted value of cash in banks and individuals seeking to become sustainable assets entrusted to the fixed return rate.

Individual Account Pension Actuarial Model under Fixed Interest Rates

In the context of the global population aging, pension issue has become highly important and pressing national concerns. Therefore, to further improve and perfect pension system, especially for the pension insurance system, has a very important social value. From the following aspects of old-age insurance personal accounts actuarial model: The first, deduced fixed interest rate, monthly payment of personal accounts pension actuarial model; the second, taking into account the impact of different factors on interest rates, constructed in the form of joint modeling standard Wiener process and Poisson process personal accounts pension actuarial model formula is derived.

Forecasting Weekly Auction of the 91-Day Treasury Bill Rates of Ghana

A Treasury Bill is a short term investment product offered by the Bank of Ghana on behalf of the government. An investor in Treasury Bills lends his/her idle funds to the government at a fixed interest rate for either 91, 182 or 364 days. In this study we employed univariate time series Autoregressive Integrated Moving Average (ARIMA) model to forecast government 91-Day Treasury Bill rates for the next eighteen (18) weeks in Ghana in 2014 using Box Jenkins approach. The results showed that ARIMA (2,0,1) model was appropriate for modelling the weekly auction of 91-Day Treasury Bill rates with a maximum log likelihood value of 246.42, and least AIC value of -482.83, AICc value of -482.14 and BIC value of -470.23. An ARCH-LM test and Ljung-Box test on the residuals of the models revealed that the residuals are free from heteroscedasticity and serial correlation respectively. Therefore investors can plan their future investments by considering the future behavior of the 91-Day Treasury Bill rates for next eighteen (18) weeks.

Adjustable and fixed interest rates mortgage markets modelling

Due to recent developments in credit markets, the interdependencies among fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs) markets are analysed in the study of the interactions within credit markets since it appears very suitable and interesting. A meaningful and complete database of information on Financial Institutions in Italy (1997:q1–2011:q4) hold by the Banca d’Italia shows that the relative importance of these markets recently displayed significant fluctuations since in 2005 fixed interest rate mortgage loans were about 10 % while in 2009 they raised up to 70 %. In the context of the FRMs and ARMs characteristics in Italian markets as well as the available database, among the proposed models for the study of interconnected markets (see Brock and Hommes in Econometrica 65(5):1059–1095, 1997, J Econ Dyn Control 22:1235–1274, 1998; Dieci and Westerhoff in Appl Math Comput 215:2011–2023, 2009; J Econ Behav Organ 75(3):461–481, 2010 and related literature cited therein), the models recently developed by Casellina et al. (Comput Econ 38:221–239, 2011) is applied to test its capacity to capture the dynamics of the observed data. It is worth stressing that the involved real data (volume of contracts and average interest rate in the FRMs and ARMs markets) are not sample information but they are evaluated on the entire population. The obtained findings point out the good level to fit the interest rates dynamics. Moreover, the model captures the switching mechanism and it catches the structural breaks when they occurs.

A INDÚSTRIA AUTOMOBILÍSTICA NO BRASIL E A DEMANDA DE VEÍCULOS NO PERÍODO 2000-2010

O presente artigo tem como objetivo geral realizar uma análise da indústria automobilística no Brasil contrastando o cenário de produção nacional com o internacional no período recente (até 2010), bem como verificar a influência de algumas variáveis selecionadas sobre a demanda de veículos automotores no mercado interno. Constatou-se que a China e Índia estão moldando os padrões de concorrência internacional no período recente. Além disso, entre um conjunto de variáveis testadas econometricamente, infere-se que a demanda de veículos automotores no mercado interno tem sofrido maior influência dos fatores preço, volume de financiamentos e taxas de juros (operações de crédito com recursos livres referenciais para taxa de juros pré-fixada) no período analisado.

Financing of Low-Rent Housing REITs in China

AbstractTaking the special features of the Chinese real estate market and financial market into account, this paper explores the application of real estate investment trusts (REITs) in low-rent housing and introduces an agent-based simulation model for low-rent housing REITs in the issuing and trading markets. Overcoming the difficulty of lacking relevant REITs models and data in China, We find that how the rental income and government subsidy, market fixed interest rate, dividend proportion of low-rent housing REITs and market surplus fund influence the financing of low-rent housing REITs.

Banking advice on fixed or adjustable mortgage rates

Since the mid-1990s, Sweden has experienced a period of rapidly rising property prices, and household indebtedness has kept an even pace. The choice between fixed and adjustable interest rates has become increasingly important. This article analyses mortgage rate advice issued by a bank adviser in monthly newsletters during the period 2001–2009, focusing on the content and searching for patterns that may be related to earlier findings. The banking advice is classified into two dimensions: the content and the strength of advice. We find that a large part of the advice suggests that borrowers divide their loans and choose both adjustable and fixed interest rates. Contrary to existing literature, there is no apparent association between the advice provided and interest rate trends (neither short- nor long-term trends). Nor do we find a significant association between the advice and the interest rate gap between fixed and variable rates. This finding implies that the advice in these newsletters was formulated on a rather unclear basis and was of limited use for borrowers.

Fixed Come Hell or High Water? Selection and Prepayment of Fixed‐Rate Mortgages Outside the United States

We examine the decision to prepay a fixed‐rate mortgage in the United Kingdom, Canada, Ireland, Australia and New Zealand. These countries are characterized by having substantial fees which are associated with breaking a fixed‐rate mortgage. We develop a model which allows for fluctuations both in banks’ wholesale rates and credit spreads. We find that households can achieve economically significant benefits both from following an optimal prepayment strategy contingent on the break fee used by their bank and also by selection of fixed interest rate term and (where available) break fee structure.

Reinventing Homeownership: A Compendium of Concepts to Consider

This policy brief presents a compendium of innovative mortgage products that challenge the dominant mortgage product of the 20th Century, the high down payment, thirty year amortization, fixed interest rate mortgage. These innovative products do not, however, go to the other extreme like the subprime and Alt-A mortgages of the early 21st Century with attributes such as low down payments, balloon payments and quick to adjust interest rates. Rather, they take into account demographic trends, changes in the workplace and existing barriers to homeownership to structure new products for contemporary households. These innovative products take on the big questions in residential mortgage finance. What is the future of the FRM? What is the fate of the low-down-payment mortgage? And what does homeownership mean today?

The Regulation of Mutual Fund Debt

This Article offers the first general examination of mutual fund capital structure regulation under the Investment Company Act of 1940. Such an examination is long overdue, because American mutual funds collectively hold $12 trillion in assets—about as much as the commercial banking industry—and regulation constrains their use of debt capital very tightly. The Article reaches two conclusions: First, the regulation of mutual funds’ capital structure is incoherent. Although we might imagine several purposes for this regulation, such as limiting risks to investors and the financial system and preventing investor confusion, the regulation is not actually consistent with these purposes. It does both too much and too little to achieve them. Second, although at present the only type of security mutual funds can issue is common stock, there is no compelling reason why they should not also be allowed to issue debt securities. Debt securities might benefit investors by offering a safer and more stable alternative to the common stock of money market funds. Unlike shares in money market funds, debt securities could offer fixed interest rates and the safety of senior priorities. Such a proposal is clearly feasible, because mutual funds already borrow from banks and derivative counterparties and they issued debt securities without problems in the era before regulation.

Fixed Interest Rates over Finite Horizons

We consider finite horizon conditioning paths for nominal interest rates in New Keynesian monetary policy models. This is done two ways. First, we develop a simple way to use policy interventions in the form of interest rate shocks to achieve the conditioning path and show this yields a unique solution. We then modify this method to generate an infinity of solutions making the model better behaved but effectively indeterminate. Second, we use two-part rules where a specially designed targeting rule generates fixed interest rates endogenously over the initial period before reverting to a more conventional instrument rule. We show that the two approaches are equivalent. We discuss appropriate selection criteria over the resulting equilibria.

Analisis Investasi Instrumen Obligasi

Companies are difficult to obtain bank loans in large amounts can obtain public funds by selling bonds. Because the relationship is directly intertwined with public investors, the loan amount can be larger with a cheaper interest rate than bank loans. For the investor, investing in bonds relatively more than the profitguarantee stock. Bond investors from income levels can be calculated relatively from awal.Obligasi generally provide a fixed interest rate for six the first month. Usually, in order to attract investor interest, fixed rate bonds are set higher than the bond launched on time deposito.Jika interest rates move down, then the isseur (corporate bonds) will suffer a loss. However, if the bonds are sold at the interest rate moves up, it could be that the effect was not offered investors received. For the investor risks losing the possibility of falling bond prices and bond investment opportunities outside if at that time the interest rate more higher than the interest rate bonds. Issuance of bonds, in particular, is much more difficult than stocks because bond issuers should consider carefully the movement of interest rates. For investors who are actively conducting transactions, the instrument can also bring in revenue bonds in the form of capital gains. The bondholders have the right to claim precedence over shareholders.

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The Effect of Financial Literacy on Mortgage Choices

A growing body of literature shows that financial literacy affects household savings and investment choices. Less attention has, however, been devoted to its effect on debt behavior. This paper contributes to filling this gap by considering how financial literacy influences household attitudes with respect to the most common of family debts, the house mortgage. Using Italy as a case study, it considers the effect of financial literacy on three mortgage-related decisions, namely, the choice of lender and the decision between adjustable and fixed interest rates, as well as situations of mortgage misconduct. We find that the more financially literate individuals are, the more likely they are to shop around and compare mortgages for better economic conditions (in contrast to the less financially literate, who tend to take on mortgages from the first financial intermediary they contact), the more prepared they are to diversify risks by better connecting their risk exposure with different types of mortgage, and the less likely they are to experience delays in repayments.

Further generalization of Faustmann's formula for stochastic interest rates

Markov decision process (MDP) models generalize Faustmann's formula by recognizing that future stand states, prices, and interest rates, are not known exactly. Buongiorno (Forest Science 47(4) 2001) presents a dynamic programming and a linear programming formulation of the MDP model with a fixed interest rate. Both formulations are generalized here to account for a stochastic interest rate. The objective function is the expected present value of returns over an infinite horizon. It gives, like Faustmann's formula, the value of the land and the eventual standing trees. The changes between stand states, prices, and interest rate, are represented by Markov chains. Faustmann's formula is a special case where the change from one state to another has 0 or 1 probability, and the interest rate is constant. The MDP model applies to any stand state, even- or uneven-aged, and the best decisions are tied uniquely to the current system state. An example shows the effects of recognizing variations in interest rate on the land expectation value, and the cost of ignoring them.

Effects of stochastic interest rates in decision making under risk: A Markov decision process model for forest management

Most economic studies of forest decision making under risk assume a fixed interest rate. This paper investigated some implications of this stochastic nature of interest rates. Markov decision process (MDP) models, used previously to integrate stochastic stand growth and prices, can be extended to include variable interest rates as well. This method was applied to Douglas-fir/western hemlock forests in the Pacific Northwest of the United States. An MDP model was used to find the harvest decisions that maximized the forest value of a stand in a particular state, given the price level and interest rate. This optimal policy was compared with the policy that would hold in the same context but with an interest rate fixed at its historical average. The results showed that when the interest rate was lower than its historical average, the best decision differed for 52 of the 192 possible combinations of stand state and price level. Assuming a fixed interest rate underestimated the forest value by 4% to 16% depending on the initial condition. However, applying the harvest policy derived with a fixed interest rate led to a loss of no more than 7% depending on the initial condition. Taking explicit account of the variability of interest rate in setting harvest policies had some unexpected ecological benefits.

Capital Services in U.S. Agriculture: Concepts, Comparisons, and the Treatment of Interest Rates

This paper begins with a review of the methods and assumptions used to measure capital service flows. Two data series on capital inputs in U.S. agriculture are briefly described and compared. We show that measures of capital services are sensitive to the treatment of interest rates. Notably, the use of fixed versus variable market rates significantly affects measures of the quantity and productivity of agricultural capital in the United States. We conclude that when calculating capital usage in U.S. agriculture, the use of a fixed interest rate generates more plausible estimates than the use of an annual market rate.