Interest Rate Sensitivity
The financial markets both impact and are controlled by the interest rate sensitivity. Therefore, understanding the term structure of the interest rates and the intrinsic price of the fixed income security is one of the core aspects of the financial markets. In this paper, we will focus on the valuation of bonds with embedded options such as call and put through binomial interest rate tree. Additionally, we will also comment on the concept of effective duration and how the same affect the bonds. Important to note, while an option free bond can be easily valued using the spot rates, ...
