École Polytechnique Fédérale de Lausanne

Interest Rate Models

Taught in English

Some content may not be translated

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Gain insight into a topic and learn the fundamentals

Damir Filipović

Instructor: Damir Filipović


(184 reviews)

Advanced level
Designed for those already in the industry
29 hours to complete
3 weeks at 9 hours a week
Flexible schedule
Learn at your own pace

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There are 6 modules in this course

What's included

1 video5 readings

We learn various notions of interest rates and some related contracts. Interest is the rent paid on a loan. A bond is the securitized form of a loan. There exist coupon paying bonds and zero-coupon bonds. The latter are also called discount bonds. Interest rates and bond prices depend on their maturity. The term structure is the function that maps the maturity to the corresponding interest rate or bond price. An important reference rate for many interest rate contracts is the LIBOR (London Interbank Offered Rate). Loans can be borrowed over future time intervals at rates that are agreed upon today. These rates are called forward or futures rates, depending on the type of the agreement. In an interest rate swap, counterparties exchange a stream of fixed-rate payments for a stream of floating-rate payments typically indexed to LIBOR. Duration and convexity are the basic tools for managing the interest rate risk inherent in a bond portfolio. We also review some of the most common market conventions that come along with interest rate market data.

What's included

5 videos2 readings6 quizzes

We learn how to estimate the term structure from market data. There are two types of methods. Exact methods produce term structures that exactly match the market data. This comes at the cost of somewhat irregular shapes. Smooth methods penalize irregular shapes and trade off exactness of fit versus regularity of the term structure. We will also see what principal component analysis tells us about the basic shapes of the term structure.

What's included

4 videos5 quizzes

Models for the evolution of the term structure of interest rates build on stochastic calculus. We start with a crash course in stochastic calculus, which introduces Brownian motion, stochastic integration, and stochastic processes without going into mathematical details. This provides the necessary tools to engineer a large variety of stochastic interest rate models. We then study some of the most prevalent so-called short rate models and Heath-Jarrow-Morton models. We also review the arbitrage pricing theorem from finance that provides the foundation for pricing financial derivatives. As an application we price options on bonds.

What's included

4 videos1 reading5 quizzes

We apply what we learnt to price interest rate derivatives. Specifically, we focus on the standard derivatives: interest rate futures, caps and floors, and swaptions. We derive the industry standard Black and Bachelier formulas for cap, floor, and swaption prices. In a case study we learn how to calibrate a stochastic interest rate model to market data.

What's included

4 videos5 quizzes

What's included

1 reading1 quiz


Instructor ratings
4.5 (37 ratings)
Damir Filipović
École Polytechnique Fédérale de Lausanne
1 Course34,192 learners

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