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FNMA has direct holdings of 30-year fixed-rate mortgages financed by three- to five-year agency securities sold...

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Finance

FNMA has direct holdings of 30-year fixed-rate mortgagesfinanced by three- to five-year agency securities sold to thepublic.

What kind of interest rate option could FNMA use to limit theinterest rate risk? Explain how this would work. Explain how acollar could also be used.

Answer & Explanation Solved by verified expert
4.0 Ratings (490 Votes)
The problem FNMA will face is that of asset liability maturity or duration mismatch The mortgages have maturity of 30 years while liabilities have maturity between three to five years If the interest rate rises the cost of funds will increase for FNMA however the interest income from the    See Answer
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FNMA has direct holdings of 30-year fixed-rate mortgagesfinanced by three- to five-year agency securities sold to thepublic.What kind of interest rate option could FNMA use to limit theinterest rate risk? Explain how this would work. Explain how acollar could also be used.

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