Learning Outcome Statements

1. The Meaning of Arbitrage-Free Valuation

a. explain what is meant by arbitrage-free valuation of a fixed-income instrument;

b. calculate the arbitrage-free value of an option-free, fixed-rate coupon bond;

2. Interest Rate Trees and Arbitrage-Free Valuation

c. describe a binomial interest rate tree framework;

3. Determining the Value of a Bond at a Node

d. describe the backward induction valuation methodology and calculate the value of a fixed-income instrument given its cash flow at each node;

f. compare pricing using the zero-coupon yield curve with pricing using an arbitrage-free binomial lattice;

4. Constructing the Binomial Interest Rate Tree

e. describe the process of calibrating a binomial interest rate tree to match a specific term structure;

5. Pathwise Valuation

g. describe pathwise valuation in a binomial interest rate framework and calculate the value of a fixed-income instrument given its cash flows along each path;

6. Monte Carlo Method

h. describe a Monte Carlo forward-rate simulation and its application.