Interest Rate Calibration: How to Set Long-Term Interest Rates in the Absence of Market Prices
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Document ID: 2008-1166 (previously 2008/06)
Published on: 13th November 2008
Author: Steffen Sorensen
Insurance firms and pension funds need to value liabilities falling far into the future. To perform these valuations ideally requires market prices with equivalent ultra long-term maturities. However, bond market maturities extend to 60 years at best and frequently far less. As a result, it is necessary to extrapolate yield curves to generate a set of 'pseudo-pricesÂ’ for the assumed, inferred prices of bonds beyond the term of the longest available traded maturity. This note explains how we set the long-term assumption for forward interest rates.
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