The Brennan and Schwartz Model

Brennan and Schwartz (BS) [10] challenge the primary assumption of many models. That is: all information about future interest rates is contained in the current instantaneous short-term interest rate and hence the prices of all default-free bonds may be represented as time-dependent functions of this instantaneous rate only. They point out that this is not an accurate representation of reality and propose an interest rate model based on the assumption that the whole term structure can be expressed as a function of the yields of the longest and shortest maturity default-free bonds.