The price of Fixed Income Derivatives is dependent on the volatility of interest rates. In particular, Bonds with Embedded Optionality such as callable or convertible bonds, utilize the volatility in pricing.
However, there is not a single model that is universally used to compute fixed income derivative prices. In fact, some models will use more than a single volatility in pricing. That is, different points along the rate curve can have different volatitilies.
The most common method is the use of a short rate model, which only requires a single volatility. This means that the function used to value the fixed income secuirities will take a volatility parameter, as follows.
{% value = f(\sigma, ....) %}
The value of the fixed income security is then the value of the security without the embedded optionality, plus
the computed value of the embedded option.