MA416      Half Unit
The Foundations of Interest Rate and Credit Risk Theory

This information is for the 2020/21 session.

Teacher responsible

Prof Mihail Zervos


This course is compulsory on the MSc in Financial Mathematics. This course is available on the MSc in Quantitative Methods for Risk Management, MSc in Statistics (Financial Statistics), MSc in Statistics (Financial Statistics) (LSE and Fudan) and MSc in Statistics (Financial Statistics) (Research). This course is available with permission as an outside option to students on other programmes where regulations permit.


Students must have completed Stochastic Processes (ST409).

Course content

This course studies the mathematical foundations of interest rate and credit risk theory. The course starts with a development of the multi-dimensional Black & Scholes theory with stochastic market data. This is then used to show how discount bond dynamics modelling can be approached by (a) the modelling of the short-rate process and the market price of risk, which underlies the family of short-rate models, or (b) the modelling of the market price of risk and the discount bond volatility structure, which gives rise to the Heath-Jarrow-Morton (HJM) framework. The course then expands on the theory of interest rate market models and credit risk.


This course is delivered through a combination of classes and lectures totalling a minimum of 30 hours across Lent Term. This year, some or all of this teaching will be delivered through a combination of virtual classes and lectures delivered as online videos.

Formative coursework

Two sets of written homework will be marked with feedback provided.

Indicative reading

T R Bielecki and M Rutkowski, Credit Risk Modeling, Valuation and Hedging, Springer; M Musiela and M Rutkowski, Martingale Methods in Financial Engineering, Springer; R Rebonato, Modern Pricing of Interest-rate Derivatives: The LIBOR Market Model and Beyond, Princeton.


Exam (100%, duration: 2 hours) in the summer exam period.

Important information in response to COVID-19

Please note that during 2020/21 academic year some variation to teaching and learning activities may be required to respond to changes in public health advice and/or to account for the situation of students in attendance on campus and those studying online during the early part of the academic year. For assessment, this may involve changes to mode of delivery and/or the format or weighting of assessments. Changes will only be made if required and students will be notified about any changes to teaching or assessment plans at the earliest opportunity.

Key facts

Department: Mathematics

Total students 2019/20: 23

Average class size 2019/20: 23

Controlled access 2019/20: No

Value: Half Unit

Guidelines for interpreting course guide information

Personal development skills

  • Self-management
  • Problem solving
  • Application of information skills
  • Communication
  • Application of numeracy skills
  • Specialist skills