Interest Rate Modelling

  • Moorad Choudhry
  • Didier Joannas
  • Richard Pereira
  • Rod Pienaar
Part of the Finance and Capital Markets Series book series (FCMS)


Chapter 4 introduced the concept of the yield curve. The analysis and valuation of debt market instruments revolves around the yield curve. Yield curve or term structure modelling has been extensively researched in the financial economics literature; it is possibly the most heavily covered subject in that field. It is not possible to deliver a comprehensive summary in just one chapter, but our aim is to cover the basic concepts. As ever, interested readers are directed to the bibliography, which lists the more accessible titles in this area.


Interest Rate Term Structure Yield Curve Forward Rate Bond Price 
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Selected References and Bibliography

  1. Baxter, M. and Rennie, A. Financial Calculus, Cambridge University Press 1996, pp. 57–62.CrossRefGoogle Scholar
  2. Black, F. ‘Interest rates as options’, Journal of Finance, December 1995, pp. 1371–6.Google Scholar
  3. Black, F., Derman, E. and Toy, W. ‘A one-factor model of interest rates and its application to treasury bond options’, Financial Analysts Journal, Spring 1990, pp.33–9.Google Scholar
  4. Brennan, M. and Schwartz, E. ‘A continuous-time approach to the pricing of bonds’, Journal of Banking and Finance, 3, 1979, pp. 133–55.CrossRefGoogle Scholar
  5. Campbell, J., ‘A defence of traditional hypotheses about the term structure of interest rates’, Journal of Finance, 41, 1986, pp.183–93.CrossRefGoogle Scholar
  6. Chen, R.-R. and Scott, L. ‘Pricing interest rate options in a two-factor Cox–Ingersoll–Ross model of the term structure’, Review of Financial Studies, Winter 1992, pp. 613–36.Google Scholar
  7. Cox, J., Ingersoll, J. and Ross, S. ‘A theory of the term structure of interest rates’, Econometrica, 53, March 1985, pp. 385–407.CrossRefGoogle Scholar
  8. Fong, H. G. and Vasicek, O. ‘Fixed income volatility management’, Journal of Portfolio Management, Summer 1991, pp. 41–6.Google Scholar
  9. Haug, E. The Complete Guide to Option Pricing Formulas, McGraw-Hill, 1998, ch. 4.Google Scholar
  10. Heath, D., Jarrow, R. and Morton, A. ‘Bond pricing and the term structure of interest rates: a new methodology for contingent claims valuation’, Econometrica, 60, January 1992, pp. 77–105.CrossRefGoogle Scholar
  11. Ho, T. and Lee, S.-B. ‘Term structure movements and pricing interest rate contingent claims’, Journal of Finance, December 1986, pp.1011–29.Google Scholar
  12. Hull, J. Options, Futures and Other Derivatives, 3rd edn, Prentice Hall, 1997, pp. 220–2.Google Scholar
  13. Hull, J. and White, A. ‘Pricing interest rate derivative securities’, Review of Financial Studies, 1990, pp. 573–92.Google Scholar
  14. Ingersoll, J. Jr. Theory of Financial Decision Making, Rowman & Littlefield, 1987.Google Scholar
  15. James, J. and Webber, N. Interest Rate Modelling, Wiley, 2000, chs 5–15.Google Scholar
  16. Jarrow, R. Modelling Fixed Income Securities and Interest Rate Options, McGraw-Hill, 1996.Google Scholar
  17. Merton, R. Continuous Time Finance, Blackwell, 1993, ch. 11.Google Scholar
  18. Rebonato, R. Interest Rate Option Models, Wiley, 1996.Google Scholar
  19. Rebonato, R., Cooper, I., ‘The limitations of simple two-factor interest rate models’, Journal of Financial Engineering, March 1996Google Scholar
  20. Ross, S. M. An Introduction to Mathematical Finance, Cambridge University Press, 1999.Google Scholar
  21. Ross, S. M. Probability Models, Academic Press, 2000.Google Scholar
  22. Sundaresan, S. Fixed Income Markets and their Derivatives, South Western Publishing, 1997.Google Scholar
  23. Tuckman, B. Fixed Income Securities, Wiley, 1996.Google Scholar
  24. Van Deventer, D. and Imai, K. Financial Risk Analytics, Irwin, 1997, ch. 5.Google Scholar
  25. Vasicek, O. ‘An equilibrium characterization of the term structure’, Journal of Financial Economics, 5, 1977, pp.177–88.CrossRefGoogle Scholar

Copyright information

© Moorad Choudhry, Didier Joannas, Richard Pereira and Rod Pienaar 2005

Authors and Affiliations

  • Moorad Choudhry
    • 1
  • Didier Joannas
    • 2
  • Richard Pereira
    • 3
  • Rod Pienaar
    • 4
  1. 1.KBC Financial ProductsUK
  2. 2.Hong KongChina
  3. 3.Nomura plcUK
  4. 4.UBS AGUK

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