With the increasing use of adjustable‐rate mortgages for asset/liability management, there exists the need to properly evaluate their price sensitivity to interest rate changes. This paper provides a foundation by deriving the duration of an adjustable‐rate mortgage. The properties of this duration are unique and have some important differences from those of fixed‐rate securities. One important characteristic of an adjustable‐rate mortgage concerns the index used to adjust the mortgage rate. It was found that the index tended to be more important than the adjustment frequency in determining the duration of an adjustable‐rate mortgage.

The present value equation in finance is shown to be equivalent to the Laplace transformation in mathematics. Based on this observation, the list of known analytic solutions for the present value problem is increased from a handful to more than one hundred. General properties of the Laplace transform are examined as well in light of the newly discovered significance for finance.

The paper analyzes the impact of a stabilization policy based on a temporary reduction in the rate of devaluation. Against a background in which a constant rate of devaluation has no real effects, it is shown that the temporary policy does and, furthermore, that the real effects tend to become bigger (in absolute value) as the horizon of the temporary policy is shortened. The central discussion is carried out in terms of a one-good, cash-in-advance model, with perfect capital mobility and Ramsey-type consumers. Results are extended to account for home goods and variable velocity; the roles of capital mobility and banking liberalization are briefly discussed.

This paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles. When a new econometric methodology for detecting asset market bubbles is used, the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar/deutsche mark and dollar/pound ratesusing monthly data over the period 1973-82. Additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care.