# Monthly Archives: November 2010

## Interest Rate Models: Steps for building Black, Derman and Toy (BDT) model in Excel: How to utilize the results of a BDT interest rate model: Pricing Options

In this post we will consider how the Black-Derman-Toy (BDT) short rate binomial tree will be used to price options on bonds. Pricing Options The BDT model may also be used to price put or call options on bonds. For the purpose of calculating these

## Interest Rate Models: Steps for building Black, Derman and Toy (BDT) model in Excel: How to utilize the results of a BDT interest rate model: Pricing Bonds

In this post we will consider how the Black-Derman-Toy (BDT) short rate binomial tree will be used to price bonds. Pricing Bonds For example, we illustrate the use of the short rates to price a hypothetical 3-year fixed income bond at issue as follows: Using

## Interest Rate Models: Steps for building Black, Derman and Toy (BDT) model in Excel: How to utilize the results of a BDT interest rate model: Derivation of Short Rates

Earlier we had looked at how the Black-Derman-Toy (BDT) interest rate model may be constructed in EXCEL. In particular we saw how the median rates and time varying volatilities (sigmas) of the short rate binomial tree were derived. In this post we will see how

## Interest Rate Models: Steps for building Black, Derman and Toy (BDT) model in Excel: Define & Set Solver Function & Results

Earlier we had considered how to define the various elements (input, output and calculation cells) of the Black-Derman-Toy (BDT) interest rate model in EXCEL. In this post we will link all these pieces together by using the Solver Function of the EXCEL worksheet. Once this

## Interest Rate Models: Steps for building Black, Derman and Toy (BDT) model in Excel: Define Calculation Cells: Calculate Yields & Yield volatility from Lattice

In this post we continue with the definition of the calculation cells of the Black-Derman-Toy (BDT) model in EXCEL by seeing how yields are determined from the prices calculated from the state price lattices. We use these determined yields to derive the yield volatility of

## Interest Rate Models: Steps for building Black, Derman and Toy (BDT) model in Excel: Define Calculation Cells: Calculate Prices from Lattice

Continuing with the definition of the calculation cells of the Black-Derman-Toy (BDT) model in EXCEL, we will see how prices are determined from the initial yield rates and from the three state price lattices in the post below. Define Calculation Cells c. Calculate Prices from

## Interest Rate Models: Steps for building Black, Derman and Toy (BDT) model in Excel: Define Calculation Cells: Construct State Price Lattices

In this post we continue with the definition of the calculation cells of the Black-Derman-Toy (BDT) model in EXCEL. Three state prices lattices are constructed. Define Calculation Cells b. Construct State Price Lattices The BDT model assumes that the short-term interest rates are log-normally distributed

## Interest Rate Models: Steps for building Black, Derman and Toy (BDT) model in Excel: Define Calculation Cells: Construct short rate binomial tree

Earlier we had defined the input and output cells for the Black-Derman-Toy (BDT) interest rate model. In this post we will consider how the first set of calculation cells, i.e. the short rate binomial tree will be defined in EXCEL. Define Calculation Cells a. Construct

## Interest Rate Models. An introductions

Interest Rate Models. In the introduction to this course we will cover interest rate models, features of a good practical model,  importance of calibrating a model and the criteria for model selection. We also briefly look at the features of equilibrium and no-arbitrage models and

## Interest Rate Modelling: Principal Component Analysis (PCA) : How to conduct a Principal Component Analysis in Excel: Solver Setup & Results

Earlier we had defined the various elements of the Principal component Analysis (PCA) process. In order to link these elements and arrive at a feasible solution we will use the Solver Function. We define target, change and constraint cells through this function and run it

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