Options, Futures, and Other Derivatives, 10th Edition

Chapter 4 Interest Rates

Interest rates are a factor in the valuation of virtually all derivatives and will feature prominently in much of the material that will be presented in the rest of this book. This chapter introduces a number of different types of interest rate. It deals with some fundamental issues concerned with the way interest rates are measured and analyzed. It explains the compounding frequency used to define an interest rate and the meaning of continuously compounded interest rates, which are used extensively in the analysis of derivatives. It covers zero rates, par yields, and yield curves, discusses bond pricing, and outlines a “bootstrap” procedure commonly used to calculate zero-coupon interest rates. It also covers forward ...