A pricing formula for discount bonds, based on the consideration of the
market perception of future liquidity risk, is established. An
information-based model for liquidity is then introduced, which is used to
obtain an expression for the bond price. Analysis of the bond price dynamics
shows that the bond volatility is determined by prices of certain weighted
perpetual annuities. Pricing formulae for interest rate derivatives are
derived.Comment: 12 pages, 3 figure
