Paul Wilmott's Quantitative Finance: Interest Rate Modeling

This assignment focuses on one-factor interest rate modeling, a crucial concept in quantitative finance. It introduces the idea of modeling interest rates as random walks, connecting fixed-income instruments with the modeling ideas of Black and Scholes. The assignment explores stochastic models for interest rates, the derivation of the bond pricing equation, and the structure of popular interest rate models. The document explains the concept of the spot rate and its modeling through stochastic differential equations. It covers the bond pricing equation for the general model, incorporating coupon payments and discussing pricing using binomial and trinomial trees, similar to equity tree models. The assignment emphasizes the mathematical similarities between interest rate models and the Black-Scholes equation while highlighting the challenges in determining the correct functional forms for the models.