The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide thecontext for applications of the models. The book presents the financial models of stock and bond options, exotic options, investment grade and high-yield bonds, convertible bonds, mortgage-backed securities, liabilities of financial institutions -- the business model and the corporate model. It alsodescribes the applications of the models to corporate finance. Furthermore, it relates the models to financial statements, risk management for an enterprise, and asset/liability management with illiquid instruments. The financial models are progressively presented from option pricing in thesecurities markets to firm valuation in corporate finance, following a format to emphasize the three aspects of a model: the set of assumptions, the model specification, and the model applications. Generally, financial modeling books segment the world of finance as "investments," "financialinstitutions," "corporate finance," and "securities analysis," and in so doing they rarely emphasize the relationships between the subjects. This unique book successfully ties the thought processes and applications of the financial models together and describes them as one process that providesbusiness solutions. Created as a companion website to the book readers can visit thomasho.com to gain deeper understanding of the book's financial models. Interested readers can build and test the models described in thebook using Excel, and they can submit their models to the site. Readers canalso use the site's forum to discuss the models and can browse server based models to gain insights into the applications of the models. For those using the book in meetings or class settings the s

PART 1. DERIVATIVES VALUATION; 1. Introduction: Discounted Cash Flow Method; 2. Equity Market: the Capital Asset Pricing Model; 3. Bond Markets: the Bond Model; 4. Equity Options: the Black-Scholes Model; 5. Interest Rate Derivatives: Interest Rate Models; 6. Implied Volatility Surface: Calibrating the Models; 7. Exotic Options: Bellman's Optimization, Filtration Model and n-Factor Model; PART 2. CORPORATE LIABILITIES; 8. Investment Grade Corporate Bonds: the Option Adjusted Spread; 9. High Yield Corporate Bonds: the Structural Models; 10. Convertibles, MBS/CMO, and Other Bonds: the Behavioral Models; 11. Financial Institutions' Liabilities: Required Option Adjusted Spread; PART 3. CORPORATE FINANCE; 12. Valuation of a Firm: the Business Model; 13. Strategic Value of a Firm: Real Option; 14. Optimal Corporate Financial Decisions: Corporate Model; 15. Risk Management; 16. Financial Institutions: Applications of Financial Models; 17. Equity Options: the Black-Scholes Model; 18. Concluding Thoughts; 19. Epilogue: Market Model and Binomial Lattices; Notation