Appendix II

Applying definition (10), we have

(II1)

(II2)

By substituting (II1) and (II2) into (9), and dividing both sides by exp(aT(1)) we have

(II3)

An obvious solution of (II3) is a = r, because the terms then cancel each other in (II3). This does not, however, indicate that (6) must necessarily hold. Thus r might in this case be any interest rate used for discounting the future net cash flows.


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