Before revision: In a previous paper it was shown that a Markov-functional model with log-normally distributed rates in the terminal measure displays nonanalytic behaviour as a function of the volatility, which is similar to a phase transition in condensed matter physics.
After revision: In a previous paper it was shown that a Markov-functional model with log-normally distributed rates in the terminal measure in discrete time. Such models are used in financial practice as parametric versions of the Markov functional model, or as approximations to the log-normal Libor market model. We show that the model has two distinct regimes, at high and low volatilities, with different qualitative behavior. The two regimes are separated by a sharp transition, which is similar to a phase transition in condensed matter physics.