Table 3 - uploaded by Patric H. Hendershott
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Value (in Basis Points) of Five Percent Life of Loan Cap for Various Values of the Observed Yield Curve Induced by Changes in Risk Aversion or in Interest Rate Expectations
Source publication
This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed...
Contexts in source publication
Context 1
... this end, the spreads between the yields on 30 year and 3 month Treasuries, as well as the value of the latter, over the past dozen years are listed in to the value of life of loan rate caps. Table 3 amortization assumption, which can be interpreted as allowing for some early Our second task is to determine the sensitivity of the value of the five percent rate cap to the variance of interest rates. The cap values are shown in Table 4 for o-ts of 0.02, 0.04 and 0.06. ...
Context 2
... these calculations, k = r 0.l we maintain Xc at 0.0222 and obtain the required term structures by varying . The middle (median variance) row reproduces some of the data from Table 3. The low variance rate (top row) eliminates the cap value at the normal term structure and sharply reduces the value at a 2 3/4 percent positively sloped yield curve. ...
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Citations
Complicated leasing terms make both the valuation of lease contracts and the calculation of effective rent levels difficult. These complications are compounded by the existence of option-like features in many contracts. For example, retail leases in the USA generally have overage rent clauses that allow the landlord additional rent if sales exceed a breakpoint, but set a minimum rent level under any sales conditions. Similarly, upward-only rent review clauses are common in the UK and Australia (as well as other commonwealth countries). Here the rent is fixed at the commencement of the contract, with the option to review the rental figure in line with market conditions at pre-determined intervals (normally every five years). If rents in the market have increased over the interim period, the rent of the subject property will be adjusted upwards accordingly and this higher level becomes the minimum possible future rent. However, if market rents have either remained static or decreased, the landlords would choose not to operate the rent review clause and the existing rent will continue. The US overage contract can be valued using a binomial approach. The upward-only adjusting leases cannot because the value of the option is “path-dependent”. Here, Monte Carlo valuation methods must be used. In this paper we describe both approaches. We show the relationship between the rents on these contracts relative to those without overage or with up and downward adjustment. The key determinants in establishing this relationship are the expected drift and the volatility of either sales (in the case of overage) or market rents (in the case of upward-only leases).
In this paper we develop a general method for valuing adjustable rate mortgages and by producing a set of simulation results, we show that our approach can be implemented. While the simulations are of interest in their own right, we view the approach itself as the major contribution of the paper. Copyright American Real Estate and Urban Economics Association.
This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed to an increase in banks' risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls.
