Interest Rate Risk Modeling: The Fixed Income Valuation Course - Nawalkha, Soto, Beliaeva

The main focus of the first book of the trilogy on the Fixed Income Valuation Course is to measure and manage interest rate risk. The book covers six types of interest rate risk models used for hedging interest rate risk arising from general non-parallel changes in the term structure of interest rates. These models can be applied in a variety of contexts by financial institutions such as universal banks, savings/thrift banks, pension funds, insurance companies, and fixed-income hedge funds. These institutions can design and execute strategies that range from the simple duration-based hedging to the more sophisticated immunization or speculative yield-curve strategies, based on multiple risk measures with off-balance sheet positions in swaps, interest rate options, and interest rate futures.

The six types of interest rate risk models covered in this book are duration and convexity models in Chapter 2, M-Absolute/M-Square models in Chapter 4, duration vector model in Chapter 5, key rate duration model in Chapter 9, principal component duration model in Chapter 10, and default-prone duration model in Chapter 11. Applications of some of these models are given for regular bonds, Treasury futures, Eurodollar futures, bond options, callable bonds, forward rate agreements, interest rate options, interest rate swaps, interest rate swaptions, mortgage-backed securities, and default-prone corporate bonds. Chapter 3 also shows how to estimate the term structure of interest rates from a cross-section of bond prices using the Nelson-Siegel exponential model and the McCulloch’s cubic spline model.

The target audience of this book is fixed-income practitioners, as well as graduate and advanced undergraduate students in the introductory courses on fixed-income topics.

  • Level: Basic+
  • Major Topics: T11, T15
  • Minor Topics: T12, T23, T26, T32

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Book Resources

CD-ROM with numerous formulas and programming tools that allow readers to play with the models in the book

Online Resources

Sample chapter, Slides, Software

Book Description


This is the first book of the trilogy on a fixed-income valuation course by Wiley finance. This trilogy covers the following three areas of fixed-income valuation: 1. Interest rate risk modeling. 2. Term structure modeling. 3. Credit risk modeling. In the first book, we give a basic introduction to various fixed-income securities and their derivatives. The principal focus of this book is on measuring and managing interest rate risk arising from general nonparallel rate changes in the term structure of interest rates... read more

Table of Contents

Chapter 1. Interest Rate Risk Modeling: An Overview
Chapter 2. Bond Price, Duration, and Convexity
Chapter 3. Estimation of the Term Structure of Interest Rates
Chapter 4. M-Absolute and M-Square Risk Measures
Chapter 5. Duration Vector Models
Chapter 6. Hedging with Interest-Rate Futures
Chapter 7. Hedging with Bond Options: A General Gaussian Framework
Chapter 8. Hedging with Interest-Rate Swaps and Options using the Libor Market Model
Chapter 9. Key Rate Durations with VaR Analysis
Chapter 10. Principal Component Model with VaR Analysis
Chapter 11. Duration Models for Default-Prone Securities... read more


"This first book in the fixed income valuation course provides a solid, up-to-date introduction to the field of interest rate risk, and covers all bases in leading up to the complex area of fixed-income option models. For the more experienced, this is an excellent guide to the state of the art, and provides models coupled with software to make the practical use of the ideas therein feasible."

Sanjiv Ranjan Das, Co-Editor, Journal of Derivatives, and Associate Professor of Finance, Santa Clara University.

"The trilogy on the fixed income course is the first one with hands on Excel/VBA software for fixed income professionals. These are terrific books for all fixed income practitioners."

Frank J. Fabozzi, Editor, Journal of Portfolio Management, and Frederick Frank Adjunct Professor of Finance, Yale University.

"The authors are commended in expositing the many interest rate risk measures in a coherent way. This book describes the theories, implementations and applications of these measures with clarity and rigor. Further, the software assists students and practitioners alike to learn about them effectively."

Thomas Ho, Co-Author, The Oxford Guide to Financial Modeling, and President, Thomas Ho Company.

"Not only does the book provide an excellent explanation of interest rate risk models, but the included software is very comprehensive and easy to use. Excel is used as the user interface throughout. It is very easy to change the inputs and recalculate a wide variety of interest rate risk models. With simple menu choices, the student or practitioner can explore many different hedging or speculation strategies. The consistent approach used in the whole trilogy of fixed income books/software is a huge advantage."

Craig Holden, Author, Excel Modeling in Investments, and Associate Professor of Finance, Indiana University, Bloomington.

"A pedagogical and comprehensive treatment of interest rate dynamics. Extremely helpful to understand the theory and build applications."

Nassim Nicholas Taleb, Author, Dynamic Hedging: Managing Vanilla and Exotic Options, and Fooled by Randomness.

Related Papers

This is a list of papers prepared by the authors and related to the contents of the book. They go into specific topics in greater depth or introduce related issues or analysis. Each link will guide you to the paper in the Social Science Research Network (SSRN) from where you can see the abstract and download the paper.