Fixed income securities generally include interest rate bonds, credit bonds, interest rate derivatives and credit derivatives. Although the fixed-income securities are named "fixed", their returns are not fixed at all, especially in the global financial market, interest rate risk, foreign exchange risk and credit risk always affect the income fluctuation of fixed-income products. In order to hedge the risk of fixed-income products, financial markets have developed fixed-income securities derivatives.

The pricing basis and interest rate dependence of fixed income securities and their derivatives are completely different from those of ordinary stock derivatives. In the pricing of stock derivatives such as stock options and stock index futures, it is usually assumed that interest rates and stock prices are relatively independent, so there is no need to consider the stochastic process of interest rates. However, in fixed-income securities and their derivatives, both long-term interest rates and short-term interest rates are closely related to interest rates, so it is impossible to assume that interest rates are relatively independent. This makes it difficult to price fixed-income securities and their derivatives. Beginners will encounter these puzzles when learning the pricing model of fixed-income securities. Even after studying traditional stock derivatives, they still can't fully understand the pricing of interest rate derivatives. It is not feasible to mechanically apply the pricing model of stock derivatives to the pricing of fixed-income derivatives. The purpose of writing this book is to try to solve this difficulty and introduce the pricing model of fixed-income securities and their derivatives to beginners and a wide range of industry professionals.

How can we learn the pricing model of fixed income securities and their derivatives well? The core is to build intuition about products.

The core concept of fixed income securities and their derivatives is interest rate, but interest rate itself is a derivative concept, because it depends on the calculation of days and the frequency of interest calculation. There are two keys to understanding interest rates. A key is to understand the relationship between bond prices and interest rates. Another key is to understand the interest rate swap products and their pricing. The former is a cash product and the latter is a derivative.

Financial derivatives can be divided into linear and nonlinear. Linear products are priced directly by no arbitrage principle, while nonlinear products need to be related to volatility. The relationship between interest rate and discounted value is obviously nonlinear. Grasping the linear and nonlinear relationship of interest rate derivatives is the first step to correctly understand fixed-income securities and derivatives. This is also the obvious difference between this book and other textbooks, that is, it clearly distinguishes linear products from nonlinear products, and at the same time clarifies the pricing principle of linear products, and further obtains the differences in pricing methods of nonlinear products.