The Vasicek Model of Interest Rates for Beginners

Learn the basics associated with the Vasicek model of interest rates

The Vasicek Model as it pertains to interest rates is a tool that is utilized to predict interest rate movements from only one source of market risk. (This is known as a one factor predictor.) The model is often used to determine the valuation of various interest rate derivatives within the market.

Take the time to learn about the Vasicek Model and see how it might apply to your financially-based business. Here are some resourceful links to get you started on your journey. Think of this as "the Vasicek Model of interest rates for beginners."

1. Find the equation for the interest rate Vasicek Model so that you can learn how it is calculated.

2. Learn how the exponential Vasicek Model affects bond pricing and yield curves on a moment-to-moment basis while the bond market is open.

3. Learn about the finer point of the Vasicek Model like points of Vasicek distribution or calibration.

Educate yourself about the interest rate Vasicek Model equation

Like any set of interest rates or calculations, there is a corresponding equation that produces the result. (It hasn't always been calculators.) Take the time to learn about the Vasicek interest rate equation so that you may understand the principal of how it is calculated and how it predicts the movement of interest rate derivative products.

Educate yourself on how a exponential Vasicek Model affects the price of bonds

The basic theory behind bond investing is that an investor purchases a bond for a price. After the bond reaches maturity, the investor is then paid back his initial investment, plus some additional money. The additional money is called the interest. The amount of interest the investor will be paid is based on the risk they took (how reputable the company was to be able to pay back the bond) as well as other market factors such as the current interest rates on other bond products. In this way, the Vasicek Model may be utilized to predict the yields as certain bonds might pay based on risk.

Find out about the subtler points of the Vasicek Model such as points of distribution

Now that you understand the basic equations associated with the model, and have learned how it interacts with bond prices, you now want to study the finer points so that you can read the charts and graphs associated with the Vasicek models. Things to look out for are the Vasicek distribution, Vasicek calibration, two factor Vasicek and more.