4. Interest rates

In ordinary life, there are many different interest rates—mortgage rates, rates on credit cards, and rates paid by savings accounts—which are mirrored in the commercial world by loans for short-term funding and longer term loans for business development and project finance. The reasons for so many different rates are market conditions and credit risk. ‘Interest rates’ discusses the trading of interest rates, focusing on the interbank market, which is the area where most trading takes place, most quant effort is deployed and in whose development mathematical finance has played a key role. The basic terminology—including zero coupon bonds, swap rate, yield curve generator, LIBOR rates, and whole yield models—are explained.