This text examines the theory and nature of interest rates - why they exist, their changing behaviour, the relationships between rates for different market instruments, interest rate differentials, flow of funds, market efficiency, the effect of imperfections on interest rates, and the use of options and option type instruments. It evaluates the relevant empirical evidence bearing on the theories presented. New features of this edition include: sections on financial innovation, securitisation and arbitrage; an emphasis on empirical evidence concerning inflation and interest rates; a new section on the Cox-Ingersoll-Ross theory of term structure; analyses of the behaviour of duration with respect to maturity, coupon rate, changing interest rates, and volatility and risk; new sections on quality delivery options, futures and spot price relationships and hedge ratios; and new chapters on option-type instruments, embedded options and interest-rate swaps and controlling currency risk.