This work presents the term structure of interest rate and bond valuation modeling in a period of economic distortion. In real life, we do not expect interest rate to be constant. Government policies affect the interest rate of debt instrument. By the theory of economic fluctuations, there will be economic shocks that distort the lending rates. With these shocks, investors tend to limit potential losses. With the equation that determines the market price of the bond at time t, the market price at which the stream of continuous cash flows would trade (if arbitrage is avoided) is formulated. Thus the sensitivity of market price due to interest rate, duration and convexity of the market price due to interest rates are formulated and solved.

1. THE TERM STRUCTURE OF INTEREST RATES AND BOND
VALUATION MODELLING IN A PERIOD OF ECONOMIC
DISTORTION
BEING A PROJECT SUBMITTED TO THE DEPARTMENT OF MATHEMATICS IN PARTIAL
FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF MASTER OF SCIENCE
(M.SC) DEGREE IN MATHEMATICS.
(PAGES :86)
ABSTRACT
This work presents the term structure of interest rate and bond valuation modeling in a
period of economic distortion. In real life, we do not expect interest rate to be constant.
Government policies affect the interest rate of debt instrument. By the theory of
economic fluctuations, there will be economic shocks that distort the lending rates. With
these shocks, investors tend to limit potential losses. With the equation that determines
the market price of the bond at time t, the market price at which the stream of
continuous cash flows would trade (if arbitrage is avoided) is formulated. Thus the
sensitivity of market price due to interest rate, duration and convexity of the market
price due to interest rates are formulated and solved.
CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of Contents vi

2. CHAPTER ONE:
Introduction 1
1.1 Aims and Objectives 3
1.2 Scope of the Study 3
1.3 Limitation of the study 4
CHAPTER TWO:
2.0 Literature Review 6
CHAPTER THREE:
3.0 Debt Instruments 16
3.1 Bond Yield 24
3.1.1 Bond Duration 29
3.2 Convertible Bonds 32
3.2.1 Determinants of the Market Prices of a Convertible Bond 37
3.3 Factors Influencing Bond Prices and Interest Rates. 39
3.4 The Term Structure of Interest Rates. 41
3.4.1 The Spot Rates 43
3.4.2 The Forward Rates 45
3.4.3 The Swap Curves/Rates 47

3. CHAPTER FOUR:
4.1 The Model 49
4.2 Method of Solution 50
4.3 The Analysis of the Model 56
CHAPTER FIVE:
5.1 Discussion of Results 59
5.2 Summary 61
5.3 Conclusion 62
References
Appendix/Glossary
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