Marti Subrahmanyam [1996] provides an excellent review of models that
deal with the dynamics of the term structure of interest rates. Most o
f this work has been accomplished in the last twenty years, partly sti
mulated by academic interest to apply the Black-Scholes framework to t
he pricing of interest-rate options but also by practitioners' needs t
o manage interest-rate risks. In the following, I shall first put the
theoretical work on the term structure into the broader perspective of
capital market research in order to highlight some important differen
ces between valuation of stocks and of bonds. Second, I shall address
some specific issues in modeling the term structure to reveal potentia
l deficiencies of the current state of the art. Third, I shall discuss
some implications for financial risk management.