A Comparison of Fixed And Adjustable Rate Mortgages In The Kenyan Market Dissertation / Thesis

Author: Mutinda, Mary Wanza
Title: A Comparison of Fixed And Adjustable Rate Mortgages In The Kenyan Market
Abstract: This project aims to offer a side-by-side comparison of fixed and adjustable rate mortgage. It seeks to estimate the probabilities of default and prepayment in a homogenous mortgage portfolio and uses this as input variables in the comparison. In this project both static and dynamic valuation are used to compare the performance of a FRM vs. an ARM. It is discovered that adjustable rate mortgages are by far more commonly issued instruments in Kenya and are marginally superior to the fixed rate mortgages priced at par. However. the fixed rate mortgage instrument. which was recently introduced is gaining popularity. The comparison is limited to 15 year ARM and FRM.-In Kenya mortgage can run longer. Using Cox. Ingersoll and Ross (1985) interest rate model. we simulate 4 paths of future risk free interest rates and use this as input to model the refinancing incentive and deduce the coupon rate of the adjustable rate mortgage. Using excel we come up with the cash flow model. The cash flow model formulas used are those derived by Fabozzi in "The handbook of mortgage backed securities" The valuation carried out involves obtaining the net present value. Bond equivalent yield. duration. average life and OAS. The cash flows are also studied statistically to deduce if there existing significant difference.
Keywords: mortgage pricing; Option adjusted spread; Adjustable rate mortgage; fixed rate mortgage
Degree Granting Institution: University of Nairobi  
Date Published: 2005-07