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.
- ARM 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:
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
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
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 6.0,
ADJUSTFREQ=6, MAXADJUST=0.5, and the
ESTIMATEDCASE=(6=6.5, 12=7.5), the actual nominal
rates charged on the loan would be 6.0% initially, 6.5% for the sixth through
the eleventh periods, and 7.5% for the twelfth period onward.
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.
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.
Copyright © 1999 by SAS Institute Inc., Cary, NC, USA. All rights reserved.