In Term Structure Model 1, what does 'dr' represent?

In Term Structure Model 1, 'dr' represents the change in interest rates over a small time interval. This notation is commonly used in mathematical finance and represents a differential change, highlighting how interest rates can vary over infinitesimally small time frames. Understanding this concept is crucial as it relates directly to how interest rates evolve and influence the pricing and valuation of bonds over time.

Options that relate to duration or volatility of bonds, while important concepts in fixed income, do not accurately define 'dr' in the context of this model. The term "drift rate" refers to a component used in certain stochastic models, but 'dr' specifically denotes the change in interest rates, making the representation vital for modeling interest rate dynamics in fixed income analysis.