A framework for extrapolation of long-term interest rates

The valuation of long-term liabilities necessarily involves the extension of yield curves beyond market quoted maturities. This article presents a method that results in decreased price volatility compared with Ceiops' approved approach. By David Antonio, Stephen Carlin, John Hibbert, Colin Holmes, Zhuoshi Liu, David Roseburgh and Steffen Sorensen

1. Introduction

Risk-free yield curves are the basic building blocks for the valuation of future financial claims and long-term risk management. In highly developed fixed income markets we may be able to observe bonds or interest rate swap contracts with maturities of up to 50 years. In less developed markets liquid bond quotations might be limited to only a few years: in some cases, e.g. Argentina, no more than a handful of traded bond prices. In either case, liabilities of long-term financial