PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

218 MODELING FINANCIAL SCENARIOS50th year. The initial nominal interest rate indicated in the model(1.1%) is in line with the user-defined starting level (June 2004)of 1.1%. The 1st—99th percentile range for the one-month nominalinterest rate after 10 years is 0.0% to 19.4%.The mean one-year nominal interest begins at 1.9% and movesto 7.7% by the end of 50 years. The initial value is again in linewith the current level of interest rates. The 1st—99th percentilerange of the one-year nominal interest rate after 10 years is 0.0%to 18.3%.The mean 10-year nominal interest begins at 4.6% and movesto 7.1% by the end of 50 years. The initial value is in line withthe current level of interest rates for long-term bonds, given theJune 2004 10-year U.S. Treasury yield of 4.4%. The 1st—99thpercentile range of the one-year nominal interest rate after 10years is 0.6% to 12.7%.The funnel of doubt graphs of one-month, one-year, and 10-year nominal interest rates, Figures 8 through 10, are similarto the real interest rate and inflation graphs, but have a barrierat zero since the restriction that nominal interest rates not benegative is applied in this case. This restriction affects the 1stpercentile line on Figures 8 and 9, but not the 25th percentileline. The effect of the restriction is not apparent for the 10-yearnominal interest rates. The level of uncertainty increases overthe 50-year time period used in the forecast. Since the nominalinterest rate is determined by adding the real interest rate to theinflation rate, the increasing uncertainty reflected by real interestrates and the inflation rate generates the same behavior fornominal interest rates.The histograms for the three-month, one-year, and 10-yearmodel nominal interest rates and the actual three-month, oneyear,and 10-year nominal interest rates are displayed in Figures11 through 13. (The one-month values are not consistently availablefor historical data over a long enough time period to be re-