Chapter

BOND PRICING, INTEREST-RATE PROCESSES, AND THE LIBOR MARKET MODEL

Ser-Huang Poon and Richard Stapleton

in Asset Pricing in Discrete Time

Published in print January 2005 | ISBN: 9780199271443
Published online July 2005 | e-ISBN: 9780191602559 | DOI: http://dx.doi.org/10.1093/0199271445.003.0007
BOND PRICING, INTEREST-RATE PROCESSES, AND THE LIBOR MARKET MODEL

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‘Bond Pricing, Interest-rate Processes, and the LIBOR Market Model’ uses the complete market, pricing kernel approach to value bonds, given stochastic interest rates. To value interest-rate derivatives, one important and practical problem is to model bond prices and interest rates with the correct drifts. The authors derive here the drift of the bond prices and interest rates under the period-by-period risk-neutral measure. As a special case, they derive the drift of the forward London Interbank Offer Rate (LIBOR) in what is generally known as the LIBOR Market Model.

Keywords: Bond Pricing; drift of the bond prices; drift of the forward London Interbank Offer Rate (LIBOR); interest-rate derivatives; LIBOR Market Model; period-by-period risk-neutral measure; risk-neutral measure

Chapter.  7561 words.  Illustrated.

Subjects: Financial Markets

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