This book offers a unified presentation of dynamic term structure models and their applications to the pricing and risk management of fixed income securities. The basic fixed income securities and their properties and uses as well as the relations between these securities are explained. The book presents and compares the classical affine models, Heath–Jarrow–Morton models, and LIBOR market models, and demonstrates how to apply those models for the pricing of various widely traded fixed income securities. The book has a number of distinctive features compared to other fixed-income texts. It off ... More

This book offers a unified presentation of dynamic term structure models and their applications to the pricing and risk management of fixed income securities. The basic fixed income securities and their properties and uses as well as the relations between these securities are explained. The book presents and compares the classical affine models, Heath–Jarrow–Morton models, and LIBOR market models, and demonstrates how to apply those models for the pricing of various widely traded fixed income securities. The book has a number of distinctive features compared to other fixed-income texts. It offers a balanced presentation with both formal mathematical modelling and economic intuition and understanding. A separate chapter gives an introduction to stochastic processes and the stochastic calculus needed for the modern financial modelling approach used in the book. A separate chapter explains how the term structure of interest rates relates to macro-economic variables and to what extent the concrete interest rate models are founded in general economic theory. The book focuses on the most widely used models and the main fixed income securities, instead of trying to cover all the many specialized models and the countless exotic real-life products. The detailed explanation of the main pricing principles, techniques, and models as well as their application to the most important types of securities will help with the understanding and application of other models and price other securities. The book includes separate chapters on interest rate risk management, credit risk, mortgage-backed securities, and relevant numerical techniques.