Lecture 14_ The Fixed Income Market Part 2_ Time Varying Interest Rates and Yield Curves.pdfVIP

15.433 INVESTMENTS Class 14: The Fixed Income Market Part 2: Time Varying Interest Rates and Yield Curves Spring 2003 Time-Varying Interest Rates T - B il l R a te s ( m o n th y ly , % ) 0 2 4 6 8 10 12 Ju n -8 5 Ju n -8 6 Ju n -8 7 Ju n -8 8 Ju n -8 9 Ju n -9 0 Ju n -9 1 Ju n -9 2 Ju n -9 3 Ju n -9 4 Ju n -9 5 Ju n -9 6 Ju n -9 7 Ju n -9 8 Ju n -9 9 Ju n -0 0 Ju n -0 1 US0003M US0001M Figure 1: Time varying interest rates, Source: Bloomberg. A Model for Stochastic Interest Rates Let rt be the time-t one-period interest rate: rt+1 = rt = k (r?