Stochastic approaches to interest rates : an honors thesis (HONRS 499)

Abstract

This synopsis of stochastic interest rates is here to provide the future actuary with some idea of the process involved in determining assumed interest rates. This is important in a couple of respects. For the actuary to earn the professional designation of Fellow in the Society of Actuaries, there is an exam that covers this topic. This exam will be required to become an Associate by the end of 1995.More importantly perhaps is the amount of interest rate manipulation that the actuary is called on to do for a company. The actuary must be well knowledged about interest rate derivation. This includes what can and cannot be assumed and also what is and is not allowed by the government. Sometimes what is acceptable by the government is more important than what could normally be assumed by prevailing rates of interest. These considerations must be weighed when determining the correct interest rate to use in any financial model.