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Financial Mathematics by Roman N. Makarov, Giuseppe Campolieti

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Chapter 15

Interest-Rate Modelling and Derivative Pricing

15.1 Basic Fixed Income Instruments

15.1.1 Bonds

The term fixed income refers to any type of investment that provides payments of a fixed amount on a fixed schedule. A most common type of fixed income investment is a bond. In Chapter 1, we introduced a zero-coupon bond (ZCB) that only returns the investor a redemption amount on the maturity date. Another example of a fixed income security is a coupon bond that provides regular payments (coupons) on a fixed schedule and a redemption value on the maturity date. Recall that Z(t, T) denotes the time-t purchase price of a unit zero-coupon bond maturing at time T with 0 ≤ tT, whose face value is equal to $1. The following notations were also ...

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