Term Structure of Interest Rates Portion

[Anonymous]

Thank you Webmaster for your brief introduction to the No-arbitrage models for valuing interest rates.
I still have problems with the following:
• Calculate the value of non-callable bonds using term structure models(Nope)
• Describe the impact of an embedded call on the value of a bond using termstructure models(Nope)
• Calculate effective duration and convexity within a term structure model(Nope)
• Compare and contrast single-factor and multi-factor models Ho-Lee, BDT are single-factor models…what about multi-factor models.
• Discuss the implications of choosing one term structure model over the others(Nope)
I really appreciate your help. Thanks.
Chirayu.

[Chirayu Trivedi]

Term Structure of Interest Rates Portion

[Anonymous]

My understanding of this is that
1. you choose your term structure model (each of them has pros and cons, mainly ability to fit the real curve, possibility of negative interest rates occur, calculation complexity)
2. estimate the parameters based on hypothetical assumptions or using the real curve
3. simulate curves (through a Monte Carlo simulation or binomial lattice, depending on your model)
4. price your bond cash flows on each calculated curve and take the average value as the estimated price.

[Author]

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