tailieunhanh - Ebook Bond markets, analysis, and strategies (9th edition): Part 2

(BQ) Part 2 book "Bond markets, analysis, and strategies" has contents: Interest-Rate models, analysis of bonds with embedded options; analysis of residential mortgage–backed securities; analysis of convertible bonds; analysis of convertible bonds, credit risk modeling,.and other contents. |        s 17 Interest-Rate Models Learning Objectives After reading this chapter, you will understand • what an interest-rate model is • how an interest-rate model is represented mathematically • the characteristics of an interest-rate model: drift, volatility, and mean reversion • what a one-factor interest-rate model is • the difference between an arbitrage-free model and an equilibrium model • the different types of arbitrage-free models and why they are used in practice • the difference between a normal model and a lognormal model • the empirical evidence on interest-rate changes • considerations in selecting an interest-rate model • how to calculate historical volatility I n implementing bond portfolio strategies, there are two important activities that a ­ anager m will undertake. One will be the determination of whether the bonds that are purchase and sale candidates are fairly priced. The same applies to any interest-rate ­ erivatives that the mand ager may want to employ to control interest-rate risk or potentially enhance returns. Second, a manager will want to assess the performance of a portfolio over realistic future interest-rate scenarios. For both of these activities, the manager will have to rely on an interest-rate model. Future interest rates are, of course, unknown. The description of the uncertainty about future interest rates is mathematically described by an interest-rate model. More specifically, an interest-rate model is a probabilistic description of how interest rates can change over time. In this chapter, we provide an overview of interest-rate models. Our focus will be on nominal interest rates rather than real interest rates (., the nominal interest rate 358 Chapter 17    Interest-Rate Models       359         s reduced by the inflation rate). At the end of this chapter, we will see how interest-rate v ­ olatility is computed using historical data. Mathematical Description of .