Inderscience Publishers

Interest rate uncertainty and investment value: a second order moment approach

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Fluctuations in the fundamental investment variable of interest rate over the life of an investment introduce uncertainty. The paper explores the relationship between interest rate uncertainty and investment value. In particular it looks at, and provides support for, the proposition that uncertainty in interest rates increases the value of an investment. The paper's contribution is that it does this in a readily understandable way, and demonstrates a clear relationship of value increase to underlying parameters, in contradistinction with existing treatments. A case study of a long-term infrastructure project is given in support of the theory.

Keywords: interest rates, uncertainty, investment, infrastructure.

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