Interest-rate models bond analysis

Chapter 3 introduced the basic concepts of bond pricing and analysis. This chapter builds on those concepts and reviews the work conducted in those fields. Term-structure modeling is possibly the most heavily covered subject in the financial economics literature. A comprehensive summary is outside the scope of this book. This chapter, however, attempts to give a solid background that should allow interested readers to deepen their understanding by referring to the accessible texts listed in the References section. This chapter reviews the best-known interest rate models. The following one discusses some of the techniques used to fit a smooth yield curve to market-observed bond yields. 

As one might expect the yields on bonds are correlated, in most cases very closely positively correlated. This enables us to analyse interest-rate risk in a portfolio for example, but also to model the term structure in a systematic way. Much of the traditional approach to bond portfolio management assumed a parallel shift in the yield curve, so that if the 5-year bond yield moved upwards by 10 basis points, then the 30-year bond yield would also move up by 10 basis points. This underpins traditional duration and modified duration analysis, and the concept of immunisation. To analyse bonds in this way, we assume therefore that bond yield volatilities are identical and correlations are perfectly positive. Although both types of analysis are still common, it is clear that bond yields do not move in this fashion, and so we must enhance our approach in order to perform more accurate analysis. 

The first two chapters of this section discuss bond pricing and yields, moving on to an explanation of such traditional interest rate risk measures as modified duration and convexity. Chapter 3 looks at spot and forward rates, the derivation of such rates from market yields, and the yield curve. Yield-curve analysis and the modeling of the term structure of interest rates are among the most heavily researched areas of financial economics. The treatment here has been kept as concise as possible. The References section at the end of the book directs interested readers to accessible and readable resources that provide more detail. 

Any models using implied forward rates to generate future prices for options underlying bonds would be assuming that the future interest rates implied by the current yield curve will actually occur. An analysis built on this assumption would, like yield-to-worst analysis, be inaccurate, because the yield curve does not remain static and neither do the rates implied by it therefore future rates can never be known with certainty. To avoid this inaccuracy, a binomial tree model assumes that interest rates fluctuate over time. These models... 

Option-adjusted spread analysis uses simulated interest rate paths as part of its calculation of bond yield and convexity. Therefore an OAS model is a stochastic model. The OAS refers to the yield spread between a callable or mortgage-backed bond and a government benchmark bond. The government bond chosen ideally will have similar coupon and duration values. 

The reactions of these radicals in aqueous solution are particularly interesting, because of their model character with respect to deoxyribose-derived radicals in DNA [83], which lead to strand breaks of this macromolecule. These model reactions have been studied in detail [84], by use of a large number of substrates, with the help of in-situ photolysis ESR, time-resolved conductance, and product-analysis techniques. From the results it is evident that the primarily formed a-alkoxy-jff-chlor-oalkyl radicals in aqueous solution undergo heterolysis of the jff-C-Cl bond with rates A het > 10 s to give rise, finally, to the y -OH-substituted analogs which were identified by ESR. 

The application of absolute reaction rate theory to a chemical change at an interface is only useful if the calculations refer to an identified, or at least reliably inferred, model of the controlling bond redistribution step. This is a problem, because it is particularly difficult to characterize the structures of the immediate precursors to reaction in many solid state rate processes of interest. The activated species are inaccessible to direct characterization because they are usually located between reactant and product phases. The total amount of reacting material present within this layer, often of molecular dimensions, is small and irreversible chemical and textural changes may accompany opening of such specialized structures for examination or analysis. Moreover, the presence of metallic and/or opaque, ill-crystalUzed product phases may prevent or impede the experimental recognition of participating intermediates or essential textural features. 

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