What does the term structure model represent in financial mathematics?

The term structure model specifically captures the relationship between interest rates and time to maturity, effectively illustrating how interest rates for bonds of differing maturities behave. This relationship is often visualized through the yield curve, which plots interest rates of bonds with equal credit quality but differing maturities. By examining the term structure, analysts and investors can glean insights into economic expectations, monetary policy effects, and the time value of money.

In contrast, other options provided focus on different aspects of finance. The distribution of stock prices over time deals with equity pricing models rather than interest rates. The variability of market returns pertains to the measurement of risk and volatility in asset prices, distinct from the concept of term structure. Lastly, the sensitivity of a bond's price to changes in interest rates refers to duration and convexity, which are metrics used once the term structure is established, rather than describing the term structure itself.