So far we have looked at static concepts around interest rates and bond and cash flow valuations. There is no meaningful reference to risk, beyod the notions of convexity and duration. It is in the dynamics of rates that we find market risk and all the implications around it.

In the sessions on derivatives these concepts will come back in a richer context related to the mitigation and administration of such risks. For now, it should suffice to take a look at various models and their implications.

We will talk about short rate processes. These will govern the evolution onf the instantaneous interest rate at any given time. There are two kinds of models. The so called one factor models, which are the one variable stochastic processes. In this context we can construct then needed curves for valuation at any point in the simulation and thus we can calculate the price of a bond.

This is part 16 of a 45-document course on Modeling Financial Markets.