ABSTRACT
Bonds are sold at an initial time for a certain price, and gives the right to obtain a certain amount of cash (higher than this initial price) in a fixed time (we restrict our consideration to zero coupon bonds only). Therefore, the owner can have a fixed income. Investments in bonds are such that money is trapped for some time period with a fixed interest rate. Therefore, the investment in bonds may be more or less profitable than the investment in a cash account. The main feature of models for a bond market is that the number of securities is larger than the number of random factors. It has explicit economical sense: there are many different bonds but their price evolution depends on few factors only, and the main factors are the ones that describe the evolution of r(t). The chapter also presents examples of Cox-Ross-Ingresoll model, conditionally log-normal model, Vasicek model, and multi-bond market model.
