Abstract
In this chapter, we survey modern term structure models for pricing fixed income securities and their derivatives. We first introduce bond pricing theory within the dynamic term structure model (DTSM) framework. This framework provides a general modeling structure in which most popular term structure models are nested. These include affine, quadratic, regime switching, jump-diffusion, and stochastic volatility models. We then review major studies on default-free bonds, defaultable bonds, interest rate swaps and credit default swaps. We outline the key features of these models and evaluate their empirical performance. Finally, we conclude this chapter by summarizing important findings and suggesting directions for future research.
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