Adjustable rate

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Adjustable rate

Applies mainly to convertible securities. Refers to interest rate or dividend that is adjusted periodically, usually according to a standard market rate outside the control of the bank or savings institution, such as that prevailing on Treasury bonds or notes. Typically, such issues have a set floor or ceiling, called caps and collars that limits the adjustment.

Adjustable Rate

An interest rate on a loan or convertible security that changes periodically. For example, an adjustable rate mortgage has a certain interest rate that changes with varying frequency. The frequency of the change is called the adjustment rate. Usually, the adjustable rate is set according to some outside benchmark; for example, a loan might set the interest rate at LIBOR + 1%. An advantage of adjustable rate loans is the fact that one's interest rate might fall over time; this is a particular advantage if prevailing interest rates are high at the time of the loan. A disadvantage to adjustable rates is the uncertainty associated with them: one's payments on the loan generally rise or fall.
References in periodicals archive ?
An analysis of 150 fixed-rate and 91 adjustable-rate HELBS reveals that, despite the subprime quality of their underlying mortgages, HELBS have had limited losses thus far.
Mortgage rate, second-lien status and combined loan-to-value (CLTV) ratio are also significant explanatory variables, but they are positively related to the loss ratios of only fixed-rate securities, and not adjustable-rate securities.
Due to relatively limited observations, however, the estimated adjustable-rate regression equation is less predictive in projecting future losses than the fixed-rate equation.
Assuming an unchanged economic environment, the estimated regression equations project that, by mid-2001 and early 2003, respectively, cumulative loss ratios will reach 2.20 percent for fixed-rate and 3.65 percent for adjustable-rate securities.
Among the selected HELBS studied in this research, 150 are backed by fixed-rate mortgages and 91 by adjustable-rate mortgages.
As of June 1998, the average ages of the underlying mortgages were only 46 and 31 months, respectively, for fixed- and adjustable-rate mortgages.
As of June 1998, the ratios of cumulative loss to original balance of fixed- and adjustable-rate securities were only 1.36 percent and 0.78 percent, respectively, as mentioned earlier.
In June, the ratios of foreclosure to current balance of fixed- and adjustable-rate HELBS were 4.15 percent and 8.74 percent, respectively.
More significant, the WAM of adjustable-rate securities was far longer, at 325 months.
However, as expected, the weighted average coupon (WAC) rate on the fixed-rate mortgages, 11.32 percent, was markedly higher than the 9.75 percent of the adjustable-rate mortgages.
Risk-based pricing also appears significant among adjustable-rate mortgages, even though they were almost always originated with initial teaser rates.
Since the current WACs of adjustable-rate mortgage pools change periodically, they provide no clues as to the credit quality of the remaining pools.

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