ARM Statement

The LOAN Procedure

ARM Statement

ARM options;

The ARM statement specifies an adjustable rate loan where the future interest rates are not known with certainty but will vary within specified limits according to the terms stated in the loan agreement. In practice, the adjustment terms vary. Adjustments in the interest rate can be captured using the ARM statement options.

In addition to the required specifications and options listed under the FIXED statement, you can use the following options with the ARM statement:

Rate Adjustment Terms Options

ADJUSTFREQ=n

specifies the number of periods (in terms of the INTERVAL= specification) between rate adjustments. INTERVAL=MONTH ADJUSTFREQ=6 indicates that the nominal interest rate can be adjusted every six months until the life cap or maximum rate (whichever is specified) is reached. The default is ADJUSTFREQ=12. The periodic payment is adjusted every adjustment period even if there is no rate change; therefore, if prepayments are made (as specified with the PREPAYMENTS= option), the periodic payment might change even if the nominal rate does not.

The ADJUSTFREQ= option can be abbreviated ADF=.

CAPS=( periodic-cap, life-cap )

specifies the maximum interest rate adjustment (in percent notation) allowed by the loan agreement. The periodic cap specifies the maximum adjustment allowed at each adjustment period. The life cap specifies the maximum total adjustment over the life of the loan. For example, a loan specified with CAPS=(0.5, 2) indicates that the nominal interest rate can change by 0.5% each adjustment period, and the annual nominal interest rate throughout the life of the loan will be within a 2% range of the initial annual nominal rate.

MAXADJUST=rate

specifies the maximum rate adjustment (in percent notation) allowed at each adjustment period. Use the MAXADJUST= option with the MAXRATE= and MINRATE= options. The initial nominal rate plus the maximum adjustment should not exceed the specified MAXRATE= value. The initial nominal rate minus the maximum adjustment should not be less than the specified MINRATE= value.

The MAXADJUST= option can be abbreviated MAXAD=.

MAXRATE=rate

specifies the maximum annual nominal rate (in percent notation) that might be charged on the loan. The maximum annual nominal rate should be greater than or equal to the initial annual nominal rate (the RATE= option value, if specified).

The MAXRATE= option can be abbreviated MAXR=.

MINRATE=rate

specifies the minimum annual nominal rate (in percent notation) that might be charged on the loan. The minimum annual nominal rate should be less than or equal to the initial annual nominal rate (the RATE= option value, if specified).

The MINRATE= option can be abbreviated MINR=.

Rate Adjustment Case Options

PROC LOAN supports four rate adjustment scenarios for analysis of adjustable rate loans: pessimistic (WORSTCASE), optimistic (BESTCASE), no-change (FIXEDCASE), and estimated (ESTIMATEDCASE). The estimated case enables you to analyze the adjustable rate loan using your predictions of future interest rates. The default is worst-case analysis. If more than one case is specified, worst-case analysis is performed. You can specify options for adjustable rate loans as follows:

BESTCASE

specifies a best-case analysis. The best-case analysis assumes the interest rate charged on the loan will reach its minimum allowed limits at each adjustment period and over the life of the loan. If you use the BESTCASE option, you must specify either the CAPS= option or the MINRATE= and MAXADJUST= options.

The BESTCASE option can be abbreviated B.

ESTIMATEDCASE=(date1=rate1 date2=rate2 ...)

ESTIMATEDCASE=(period1=rate1 period2=rate2 ...)

specifies an estimated case analysis that indicates the rate adjustments will follow the rates you predict. This option specifies pairs of periods and estimated nominal interest rates.

The ESTIMATEDCASE= option can be abbreviated ESTC=.

The ESTIMATEDCASE= option can specify adjustments that cannot fit into the BESTCASE, WORSTCASE, or FIXEDCASE specifications, or "what-if" type analysis. If you specify the START= option, you can also specify the estimation periods as dates. Estimated rates and the respective periods must be in time sequence.

If the estimated period falls between two adjustment periods (determined by ADJUSTFREQ= option), the rate is adjusted in the next adjustment period. The nominal interest rate charged on the loan is constant between two adjustment periods.

If any of the MAXRATE=, MINRATE=, CAPS=, and MAXADJUST= options are specified to indicate the rate adjustment terms of the loan agreement, these specifications are used to bound the rate adjustments. By using the ESTIMATEDCASE= option, you are predicting what the annual nominal rates in the market will be at different points in time, not necessarily the interest rate on your particular loan. For example, if the initial nominal rate (RATE= option) is 10, ADJUSTFREQ=6, MAXADJUST=0.5, and the ESTIMATEDCASE=(6=10.5, 12=10.8), the actual nominal rates charged on the loan would be 10.0% initially, 10.5% for the sixth through the eleventh periods, and 10.8% for the twelfth period onward.

FIXEDCASE

specifies a fixed case analysis that assumes the rate will stay constant. The FIXEDCASE option calculates the ARM loan values similar to a fixed rate loan, but the payments are updated every adjustment period even if the rate does not change, leading to minor differences between the two methods. One such difference is in the way prepayments are handled. In a fixed rate loan, the rate and the payments are never adjusted; therefore, the payment stays the same over the life of the loan even when prepayments are made (instead, the life of the loan is shortened). In an ARM loan with the FIXEDCASE option, on the other hand, if prepayments are made, the payment is adjusted in the following adjustment period (leaving the life of the loan constant).

The FIXEDCASE option can be abbreviated FIXCASE.

WORSTCASE

specifies a worst-case analysis. The worst-case analysis assumes the interest rate charged on the loan will reach its maximum allowed limits at each rate adjustment period and over the life of the loan. If the WORSTCASE option is used, either the CAPS= option or the MAXRATE= and MAXADJUST= options must be specified. The WORSTCASE option can be abbreviated W.

Chapter Contents
Previous
Next
Top