Background Material for Term Structure Models

Cash-flow Notation: We use (c0, c1, . . . , ci, . . . , cn) to denote the series of cash-flows where ci is received at time t = i . The length of a period, i.e. the interval of time between t = i and t = i + 1, will usually be understood from the context. Negative cash-flows refer to cash payments. The initial cash-flow, c0, will often be negative while the remaining cash-flows are positive. This situation models the cash-flows of many securities such as stocks and bonds. In such circumstances, c0 denotes the cost of the security, while later cash-flows refer to dividends, coupons or sale receipts which are all positive.