• Media type: E-Book
  • Title: Interest Rates and the Design of Financial Contracts
  • Contributor: Roberts, Michael R. [Author]; Schwert, Michael [Author]
  • Published: [S.l.]: SSRN, [2022]
  • Published in: NBER Working Paper ; No. w27195
  • Extent: 1 Online-Ressource (45 p)
  • Language: English
  • Origination:
  • Footnote: Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments May 2020 erstellt
  • Description: We show that the partial response of loan rates to interest rate changes, referred to in the bank lending literature as “stickiness,” is a feature of perfect capital markets. No-arbitrage models of credit risk are able to replicate empirical interest rate sensitivities. However, the widespread use of interest rate floors in the low-rate environment of the last decade is a result of risk-sharing and incentive considerations arising from market imperfections. Floors reallocate cash flows across states in a way that loan spreads cannot. They insure lenders against losses if rates fall, while mitigating borrower moral hazard if rates rise
  • Access State: Open Access