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The Equilibrium Spread between Variable Rates and Fixed Rates on Long-Term Financing Instruments

Published online by Cambridge University Press:  19 October 2009

George M. von Furstenberg
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Extract

One of the most important innovations in bond financing and in mortgage lending has been the rapid adoption of variable-rate instruments in recent years. Notes and bonds bearing an interest rate between one and two percentage points above the prime rate are becoming common in corporate financing. Similarly, variable-rate mortgages (VRM's) with the interest rate tied to the deposit rate of S&L's or linked to the changing yields on competing investments have spread beyond Florida and California to many states. The Federal Home Loan Bank Board has recently endorsed the variable-rate concept and the Federal Home Loan Mortgage Corporation is preparing guidelines for secondary market operations in VRM's. Portfolio managers are thus taking note of the possibility of acquiring long-term instruments providing some of the resiliency of yields and a measure of real value protection characteristic of short-term issues.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 5 , December 1973 , pp. 807 - 819
Copyright
Copyright © School of Business Administration, University of Washington 1973

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