A central argument in the ongoing discussion about the fates of Fannie Mae and Freddie Mac is the importance of the 30-year, fixed-rate, prepayable mortgage (FRM). The FRM has been held up as the gold standard in mortgage instrument design and as an essential element of the U.S. housing-finance...

A model is developed and utilized in this paper to value a life of loan interest rate cap on an ARM that reprices monthly. The value of the cap is seen to depend importantly on both the slope of the term structure and the variance of the one month rate. However, the cap value is not sensitive to...