Bond Markets, Analysis, and Strategies

by Fabozzi, Frank J.

• ISBN13: 9780131986435
• ISBN10: 0131986430
• Edition: 6th
• Format: Hardcover
• Copyright: 2010-01-01
• Publisher: Pearson College Div

Summary

Target Market: Fixed Income Securities Courses or Bond Markets Courses Fabozzi's, Bond Markets, prepares students to analyze the the bond market and use the tools for managing bond portfolios. Many texts on the market are far too theoretical, Fabozzi is quite the opposite. This text covers Bonds, analytical techniques for valuing bonds and quantifying their exposure to changes in interest rates, and portfolio strategies for achieving a clientrs"s objectives.

Table of Contents

Preface	xv
CHAPTER 1 Introduction	1	(12)
Sectors of the U.S. Bond Market	2	(1)
Overview of Bond Features	3	(3)
Risks Associated with Investing in Bonds	6	(3)
Secondary Market for Bonds	9	(1)
Financial Innovation and the Bond Market	10	(1)
Overview of the Book	11	(2)
CHAPTER 2 Pricing of Bonds	13	(21)
Review of Time Value of Money	13	(7)
Pricing a Bond	20	(8)
Complications	28	(1)
Pricing Floating-Rate and Inverse-Floating-Rate Securities	29	(2)
Price Quotes and Accrued Interest	31	(1)
Summary	32	(2)
CHAPTER 3 Measuring Yield	34	(24)
Computing the Yield or Internal Rate of Return on Any Investment	35	(3)
Conventional Yield Measures	38	(8)
Potential Sources of a Bond's Dollar Return	46	(3)
Total Return	49	(5)
Applications of the Total Return (Horizon Analysis)	54	(1)
Calculating Yield Changes	54	(1)
Summary	55	(3)
CHAPTER 4 Bond Price Volatility	58	(36)
Review of the Price-Yield Relationship for Option-Free Bonds	59	(1)
Price Volatility Characteristics of Option-Free Bonds	60	(2)
Measures of Bond Price Volatility	62	(11)
Convexity	73	(10)
Additional Concerns When Using Duration	83	(1)
Don't Think of Duration as a Measure of Time	83	(1)
Approximating a Bond's Duration and Convexity Measure	84	(2)
Measuring a Bond Portfolio's Responsiveness to Nonparallel Changes in Interest Rates	86	(3)
Summary	89	(5)
CHAPTER 5 Factors Affecting Bond Yields and the Term Structure of Interest Rates	94	(33)
Base Interest Rate	95	(1)
Risk Premium	96	(5)
Term Structure of Interest Rates	101	(21)
Summary	122	(5)
CHAPTER 6 Treasury and Agency Securities Markets	127	(28)
Treasury Securities	127	(19)
Stripped Treasury Securities	146	(1)
Federal Agency Securities	147	(6)
Summary	153	(2)
CHAPTER 7 Corporate Debt Instruments	155	(32)
Corporate Bonds	156	(18)
Medium-Term Notes	174	(3)
Commercial Paper	177	(5)
Bankruptcy and Creditor Rights	182	(2)
Summary	184	(3)
CHAPTER 8 Municipal Securities	187	(19)
Types and Features of Municipal Securities	188	(7)
Municipal Money Market Products	195	(1)
Municipal Derivative Securities	196	(3)
Credit Risk	199	(1)
Risks Associated with Investing in Municipal Securities	200	(1)
Yields on Municipal Bonds	201	(1)
Municipal Bond Market	202	(1)
The Taxable Municipal Bond Market	203	(1)
Summary	204	(2)
CHAPTER 9 Non-U.S. Bonds	206	(19)
Classification of Global Bond Markets	207	(2)
Foreign Exchange Risk and Bond Returns	209	(1)
Eurobond Market	210	(4)
Non—U.S. Government Bond Markets	214	(7)
The Pfandbriefe Market	221	(1)
Emerging Market Bonds	221	(1)
Summary	222	(3)
CHAPTER 10 Residential Mortgage Loans	225	(18)
What Is a Mortgage?	226	(1)
Participants in the Mortgage Market	226	(3)
Alternative Mortgage Instruments	229	(6)
Nonconforming Mortgages	235	(1)
Risks Associated with Investing in Mortgages	236	(5)
Summary	241	(2)
CHAPTER 11 Mortgage Pass-Through Securities	243	(30)
Cash Flow Characteristics	244	(1)
WAC and WAM	244	(1)
Agency Pass-Throughs	245	(1)
Nonagency Pass-Throughs	246	(2)
Prepayment Conventions and Cash Flow	248	(8)
Factors Affecting Prepayments and Prepayment Modeling	256	(7)
Cash Flow for Nonagency Pass-Throughs	263	(2)
Cash Flow Yield	265	(2)
Prepayment Risk and Asset/Liability Management	267	(2)
Secondary Market Trading	269	(1)
Summary	270	(3)
HAPTER 12 Collateralized Mortgage Obligations and Stripped Mortgage-Backed Securities	273	(31)
Collateralized Mortgage Obligations	274	(24)
Stripped Mortgage-Backed Securities	298	(2)
Summary	300	(4)
CHAPTER 13 Commercial Mortgage-Backed Securities	304	(24)
Commercial Mortgage Loans	305	(2)
Commercial Mortgage-Backed Securities	307	(19)
Summary	326	(2)
CHAPTER 14 Asset-Backed Securities	328	(20)
Creation of an ABS	329	(8)
Collateral Type and Sectiritization Structure	337	(1)
Credit Risks Associated with Investing in ABS	338	(3)
Review of Several Major Twos of ABS	341	(4)
Summary	345	(3)
CHAPTER 15 Collateralized Debt Obligations	348	(14)
Structure of a CDO	349	(1)
Arbitrage Transactions	350	(3)
Cash Flow Transactions	353	(3)
Market Value Transactions	356	(2)
Synthetic CDOs	358	(1)
Summary	359	(3)
CHAPTER 16 Interest-Rate Models	362	(15)
Mathematical Description of One-Factor Interest-Rate Models	363	(3)
Arbitrage-Free Versus Equilibrium Models	366	(3)
Empirical Evidence on Interest-Rate Changes	369	(2)
Selecting an Interest-Rate Model	371	(1)
Estimating Interest-Rate Volatility Using Historical Data	372	(3)
Summary	375	(2)
CHAPTER 17 Analysis of Bonds with Embedded Options	377	(30)
Drawbacks of Traditional Yield Spread Analysis	378	(1)
Static Spread: An Alternative to Yield Spread	378	(5)
Callable Bonds and Their Investment Characteristics	383	(3)
Components of a Bond with an Embedded Option	386	(1)
Valuation Model	387	(13)
Option-Adjusted Spread	400	(1)
Effective Duration and Convexity	401	(2)
Summary	403	(4)
CHAPTER 18 Analysis of Residential Mortgage-Backed Securities	407	(25)
Static Cash Flow Yield Methodology	408	(9)
Monte Carlo Simulation Methodology	417	(10)
Total Return Analysis	427	(1)
Summary	428	(4)
CHAPTER 19 Analysis of Convertible Bonds	432	(12)
Convertible Bond Provisions	432	(2)
Minimum Value of a Convertible Bond	434	(1)
Market Conversion Price	435	(1)
Current Income of Convertible Bond Versus Stock	436	(1)
Downside Risk with a Convertible Bond	437	(1)
Investment Characteristics of a Convertible Bond	438	(1)
Pros and Cons of Investing in a Convertible Bond	438	(2)
Types of Investors in Convertible Bonds	440	(1)
Options Approach	441	(1)
Summary	442	(2)
CHAPTER 20 Corporate Bond Credit Analysis	444	(49)
Overview of Corporate Bond Credit Analysis	445	(2)
Analysis of Business Risk	447	(3)
Corporate Governance Risk	450	(3)
Financial Risk	453	(3)
Corporate Bond Credit Analysis and Equity Analysis	456	(1)
Summary	457	(2)
Appendix A	459	(30)
Appendix B	489	(4)
CHAPTER 21 Credit Risk Modeling	493	(17)
Difficulties in Credit Risk Modeling	494	(1)
Overview of Credit Risk Modeling	495	(1)
Credit Ratings Versus Credit Risk Models	496	(1)
Structural Models	496	(8)
Reduced-Form Models	504	(3)
Incomplete Information Models	507	(1)
Summary	508	(2)
HAPTER 22 Active Bond Portfolio Management Strategies	510	(40)
Overview of the Investment Management Process	511	(3)
Tracking Error and Bond Portfolio Strategies	514	(8)
Active Portfolio Strategies	522	(17)
The Use of Leverage	539	(6)
Summary	545	(5)
CHAPTER 23 Indexing	550	(10)
Objective of and Motivation for Bond Indexing	551	(1)
Factors to Consider in Selecting an Index	552	(1)
Bond Indexes	553	(1)
Indexing Methodologies	554	(2)
Logistical Problems in Implementing an Indexing Strategy	556	(1)
Enhanced Indexing	557	(1)
Summary	558	(2)
CHAPTER 24 Liability Funding Strategies	560	(32)
General Principles of Asset/Liability Management	561	(5)
Immunization of a Portfolio to Satisfy a Single Liability	566	(15)
Structuring a Portfolio to Satisfy Multiple Liabilities	581	(3)
Extensions of Liability Funding Strategies	584	(1)
Combining Active and Immunization Strategies	585	(1)
Summary	586	(6)
CHAPTER 25 Bond Performance Measurement and Evaluation	592	(17)
Requirements for a Bond Performance and Attribution Analysis Process	593	(1)
Performance Measurement	593	(7)
Performance Attribution Analysis	600	(5)
Summary	605	(4)
CHAPTER 26 Interest-Rate Futures Contracts	609	(31)
Mechanics of Futures Trading	610	(2)
Futures Versus Forward Contracts	612	(1)
Risk and Return Characteristics of Futures Contracts	613	(1)
Currently Traded Interest-Rate Futures Contracts	613	(9)
Pricing and Arbitrage in the Interest-Rate Futures Market	622	(8)
Bond Portfolio Management Applications	630	(7)
Summary	637	(3)
CHAPTER 27 Interest-Rate Options	640	(43)
Options Defined	641	(1)
Differences Between an Option and a Futures Contract	641	(1)
Types of Interest-Rate Options	641	(3)
Intrinsic Value and Time Value of an Option	644	(2)
Profit and Loss Profiles for Simple Naked Option Strategies	646	(12)
Put–Call Parity Relationship and Equivalent Positions	658	(2)
Option Price	660	(1)
Models for Pricing Options	661	(8)
Sensitivity of Option Price to Change in Factors	669	(4)
Hedge Strategies	673	(5)
Summary	678	(5)
CHAPTER 28 Interest-Rate Swaps and Agreements	683	(36)
Interest-Rate Swaps	684	(24)
Interest-Rate Agreements (Caps and Floors)	708	(7)
Summary	715	(4)
CHAPTER 29 Credit Derivatives	719	(22)
Types of Credit Risk	720	(1)
Categorization of Credit Derivatives	721	(1)
ISDA Documentation	721	(2)
Asset Swaps	723	(2)
Total Return Swaps	725	(2)
Credit Default Swaps	727	(6)
Credit Spread Options	733	(2)
Credit Spread Forwards	735	(1)
Structured Credit Products	736	(1)
Summary	737	(4)
Index	741