Chapter One
Interest Rate Models
Oren Cheyette, Ph.D.
Vice President
Fixed Income Research
BARRA, Inc.
An interest rate model is a probabilistic description of the future evolution
of interest rates. Based on today's information, future interest rates
are uncertain: An interest rate model is a characterization of that uncertainty.
Quantitative analysis of securities with rate dependent cash flows
requires application of such a model in order to find the present value of
the uncertainty. Since virtually all financial instruments other than default-and
option-free bonds have interest rate sensitive cash flows, this matters to
most fixed-income portfolio managers and actuaries, as well as to traders
and users of interest rate derivatives.
For financial in ... read full excerpt from Interest Rate, Term Structure, and Valuation Modeling ebook
