Summary of Measuring Interest Rate Risk in the Very Long Term

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Judging interest rates and pricing financial instruments can challenge even the savviest professional, but determining how to adequately price risk that extends 50 years and beyond is a real conundrum. In some cases, the benchmark 30-year US Treasury bond may be insufficient. Economists Jens H.E. Christensen, Jose A. Lopez and Paul L. Mussche contend that insurers, traders and bankers can gauge interest rate risk beyond 30-year timelines through “extrapolation.” getAbstract suggests this complex yet illuminating report to insurance professionals and financial experts interested in the pricing dynamics of interest rates.

About the Authors

Jens H. E. Christensen, Jose A. Lopez and Paul L. Mussche are researchers at the Federal Reserve of San Francisco.

 

Summary

Because interest rates are “the price you pay to be able to use money sometime in the future,” financial professionals need to incorporate long-term views when setting rates on credit cards, automobile loans, mortgages and a range of financial transactions.

The interest rate continuum of US Treasury securities – considered “relatively risk-free” – provides a normally reliable basis from which to assess, gauge and price risk. For example, interest rates on 30-year mortgages  derive from the long end of the yield curve, specifically the 30-year Treasury...


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