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

Authors: David G. Carmichael; Bianca L. Bustamante

Addresses: School of Civil and Environmental Engineering, The University of New South Wales, Sydney 2052 NSW, Australia ' School of Civil and Environmental Engineering, The University of New South Wales, Sydney 2052 NSW, Australia

Abstract: 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; infrastructure projects; interest rate uncertainty; investment value; second order moment.

DOI: 10.1504/IJEME.2014.066588

International Journal of Engineering Management and Economics, 2014 Vol.4 No.2, pp.176 - 189

Received: 09 Dec 2013
Accepted: 19 Oct 2014
Published online: 03 Mar 2015 *

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