On a Class of Adjustable Rate Mortgage Loans Subject to a Strict Balance Principle

We describe the background and the basic funding mechanisms for the type of adjustable rate mortgageloans that were introduced in the Danish market in 1996. Each loan is funded separately by tap issuingpass-through mortgage bonds (`strict balance principle'). The novelty is a funding mechanism that usesa roll-over strategy, where long term loans are funded by sequentially issuing short term pass-throughbonds, and the first issuer of these loans obtained a patent on the funding principles in 1999. Publiclyavailable descriptions of the principles leave an impression of very complicated numerical algorithms.The algorithms described here show that the essentials can be reduced to a `back of an envelope' complexity.Keywords: Adjustable rate mortgages, balance principle, patent, yield curve riding