Dynamic Term Structure Modeling: The Fixed Income Valuation Course - Nawalkha, Beliaeva, Soto

The main focus of the second book of the trilogy on the Fixed Income Valuation Course is to value fixed income securities and their derivatives. Following an approach that emphasizes basic mathematical rules and heuristic derivations, over rigorous theoretical developments and technical proofs, Dynamic Term Structure Modeling covers a broad variety of term structure models, including the affine models, the quadratic models, the HJM models, and the LIBOR market models, and shows how to price basic interest rate and credit derivative products, such as, Treasury futures, Eurodollar futures, bond options, forward rate agreements, interest rate swaps, interest rate caps, interest rate swaptions, credit default swaps, credit spread options, etc.

Unlike other books in this area, Dynamic Term Structure Modeling gives intuitive explanations and fully developed examples. Some of its unique contributions include: 1) A new and comprehensive taxonomy of term structure models (TSMs) that classifies all TSMs as either fundamental models, or preference-free single-plus, double-plus, and triple-plus models; 2) New transforms for building efficient trees under state-dependent volatility models, stochastic volatility models, and jump-diffusion models, for pricing American options; 3) Analytical solutions for valuing plain vanilla derivatives under a variety of multifactor affine, quadratic, and LIBOR market models; 4) Fast computational methods such as the Fourier inversion method (including the FFT) for valuing interest rate caps and the cumulant expansion method for valuing swaptions.

This book is aimed both at the fixed income practitioners, as well as the graduate students of degree programs in mathematical finance, financial engineering, and MBA/MS/PhD in finance. The writing style of this book has been deliberately chosen to self-empower readers who wish to develop quantitative skills required for valuation of fixed income securities and their derivatives.

  • Level: Intermediate
  • Major Topics: T22, T21, T23
  • Minor Topics: T11, T12, T32, T33

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Book Resources

CD-ROM with numerous formulas and programming tools that allow readers to play with the models and value fixed income securities

Online Resources

Sample chapters, Slides, Software

Book Description



This is the second 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. Unlike other books in fixed income valuation, which are either too rigorous but mathematically demanding or easy-to-read but lacking in important details, our goal is to provide readability with sufficient rigor... read more


Table of Contents

Chapter 1. A Simple Introduction to Continuous-Time Stochastic Processes
Chapter 2. Arbitrage-Free Valuation
Chapter 3. Valuing Interest Rate and Credit Derivatives: Basic Pricing Frameworks
Chapter 4. Fundamental and Preference-Free Single-Factor Gaussian Models
Chapter 5. Fundamental and Preference-Free Jump-Extended Gaussian Models
Chapter 6. The Fundamental Cox, Ingersoll, and Ross Model with Exponential and Lognormal Jumps
Chapter 7. Preference-Free CIR and CEV Models with Jumps
Chapter 8. Fundamental and Preference-Free Two-Factor Affine Models
Chapter 9. Fundamental and Preference-Free Multifactor Affine Models
Chapter 10. Fundamental and Preference-Free Quadratic Models
Chapter 11. The HJM Model
Chapter 12. The LIBOR Market Model... read more



"This book offers the most comprehensive coverage of term-structure models I have seen so far, encompassing equilibrium and no-arbitrage models in a new framework, along with the major solution techniques using trees, PDE methods, Fourier methods, and approximations. It is an essential reference for academics and practitioners alike."
Sanjiv Ranjan Das, Professor of Finance, Santa Clara University, California, Coeditor, Journal of Derivatives.

"Bravo! This is an exhaustive analysis of the yield curve dynamics. It is clear, pedagogically impressive, well presented, and to the point."
Nassim Nicholas Taleb, Author, Dynamic Hedging and The Black Swan.

Nawalkha, Beliaeva, and Soto have put together a comprehensive, up-to-date textbook on modern dynamic term structure modeling. It is both accessible and rigorous and should be of tremendous interest to anyone who wants to learn about state-of-the-art fixed income modeling. It provides many numerical examples that will be valuable to readers interested in the practical implementations of these models."
Pierre Collin-Dufresne, Associate Professor of Finance, UC Berkeley.

"The book provides a comprehensive description of the continuous time interest rate models. It serves an important part of the trilogy, useful for financial engineers to grasp the theoretical underpinnings and the practical implementation."
Thomas S. Y. Ho, PHD, President, Thomas Ho Company, Ltd, Coauthor, The Oxford Guide to Financial Modeling.

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.