A Note on Adjustable Rate and Fixed Rate Mortgage Plans in the US
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Case Details:
Case Code : FINC048
Case Length : 14 Pages
Period : 1990-2007
Pub. Date : 2007
Teaching Note :Not Available
Organization : -
Industry : Banking
Countries : US
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Basic Parts of ARM Contd...
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• 11th District Cost of Funds Index (COFI): COFI
refers to the weighted average interest expenses incurred by the Federal Home
Loan Bank of San Francisco (FHLBS). The index is computed from interest expenses
incurred by the institutional members of FHLBS on deposit accounts. The
institutional members include Arizona, California and Nevada savings
institutions. This index is largely based on fixed rate deposits with medium and
long term maturities, and is therefore not much affected by the upward or
downward movements of market and interest rates. This is one of the popular ARM
indices and is reported monthly. (Refer to Exhibit II for the 11th District Cost
of Funds Index in 2007).
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• London Interbank Offered Rate (LIBOR): LIBOR is one
of the most popular benchmarks to determine interest rates. It is based on
rates that banks participating in the London money market offer each other
on short term deposits. LIBOR is applied to major currencies around the
world. LIBOR rate is determined every morning at 11 AM in London by British
Bankers'Association in association with Reuters. LIBOR is calculated for a
period ranging from 15 days to one year. In the US, LIBOR rate affects the
interest on Eurodollars, which refer to US currency deposited in the banks
in Europe (Refer to Exhibit III for the LIBOR rates in 2007).
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Treasury Bill (T-Bill):
T-Bill refers to short term debt obligation backed by the US government
and is free of credit risk. T-Bill is based on the interest rate paid by
the US government to private individuals, and is used to fund the debt
and other government expenses.
The bills have maturity ranging from four weeks to 1 year and are
available in the denomination ranging from US$ 1,000 to US$ 5 million.
The treasury bills are issued at discount to its par value and on
maturity, par value is paid. Every Monday, three month and six month
T-Bills are auctioned and one year T-Bills are auctioned every Tuesday. |
• 12-Month Treasury Average (MTA or MAT): MTA is a 12
month average of monthly average yields of US treasury securities adjusted to
constant maturity of one year. It is calculated by taking average of 12-month
values of CMT. The data is made available by the Federal Reserve. As it reflects
the average of annual yields, it does not fluctuate widely (Refer to Exhibit IV
for the 12-Month Treasury Average in 2007).
• Certificates of Deposit Index (CODI): CODI is calculated and published by H15
Federal Reserve Statistical Data. It is 12-month average of yields of nationally
traded 3-month certificate of deposit. It is equal to the average rate paid by
the banks to the depositors on 3-month certificate of deposits.
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