Introduction to Fixed Income Analytics Relative Value Analysis, Risk Measures and Valuation

by Fabozzi, Frank J.; Mann, Steven V.

• ISBN13: 9780470572139
• ISBN10: 0470572132
• Edition: 2nd
• Format: Hardcover
• Copyright: 2010-10-12
• Publisher: Wiley

Summary

A comprehensive introduction to the key concepts of fixed income analyticsThe First Edition of Introduction to Fixed Income Analytics skillfully covered the fundamentals of this discipline and was the first book to tie Bloomberg screens into its analysis. Since it's publication over eight years ago, major changes have taken place in the markets.That's why authors Frank Fabozzi and Steven Mann have returned with a fully updated Second Edition. This reliable resource reflects current economic conditions, and offers additional chapters on risk value analysis and risk measures and valuation, as well as information on instruments like TIPS (treasury inflation protected securities). Offers insights into value-at-risk, relative value measures, convertible bond analysis, and much more Includes updated charts and descriptions of Bloomberg screen presentations Covers important analytical concepts used by portfolio managersUnderstanding fixed-income analytics is essential in today's dynamic financial environment. The Second Edition of Introduction to Fixed Income Analytics will help you build a solid foundation in this field.

Author Biography

FRANK J. FABOZZI, PhD, CFA, CPA, is Professor in the Practice of Finance and Becton Fellow at the Yale School of Management and Editor of the Journal of Portfolio Management. He is an Affiliated Professor at the University of Karlsruhe’s Institute of Statistics, Econometrics, and Mathematical Finance and on the Advisory Council for the Department of Operations Research and Financial Engineering at Princeton University.

STEVEN V. MANN, PhD, is Professor of Finance at the Moore School of Business, University of South Carolina. He has published over seventy articles in finance journals and many books on fixed income and derivatives topics, including The Global Money Markets, Measuring and Controlling Interest Rate and Credit Risk, Securities Finance (as a coeditor), and The Handbook of Fixed Income Securities (as an assistant editor). Mann is an active consultant to clients that include some of the largest investment/commercial banks in the world as well as a number of Fortune 500 companies.

Table of Contents

Preface	p. xiii
About the Authors	p. xv
Time Value of Money	p. 1
Future Value of a Single Cash Flow	p. 1
Present Value of a Single Cash Flow	p. 4
Compounding/Discounting When Interest Is Paid More Than Annually	p. 8
Future and Present Values of an Ordinary Annuity	p. 10
Yield (Internal Rate of Return)	p. 20
Concepts Presented in this Chapter	p. 26
Appendix: Compounding and Discounting in Continuous Time	p. 27
Questions	p. 31
Yield Curve Analysis: Spot Rates and Forward Rates	p. 33
A Bond Is a Package of Zero-Coupon Instruments	p. 33
Theoretical Spot Rates	p. 34
Forward Rates	p. 44
Dynamics of the Yield Curve	p. 57
Concepts Presented in this Chapter	p. 60
Questions	p. 60
Day Count Conventions and Accrued Interest	p. 63
Day Count Conventions	p. 63
Computing the Accrued Interest	p. 74
Concepts Presented in this Chapter	p. 76
Questions	p. 76
Valuation of Option-Free Bonds	p. 77
General Principles of Valuation	p. 77
Determining a Bond's Value	p. 80
The Price/Discount Rate Relationship	p. 84
Time Path of Bond	p. 86
Valuing a Zero-Coupon Bond	p. 90
Valuing a Bond Between Coupon Payments	p. 90
Traditional Approach to Valuation	p. 94
The Arbitrage-Free Valuation Approach	p. 96
Concepts Presented in this Chapter	p. 107
Questions	p. 108
Yield Measures	p. 109
Sources of Return	p. 109
Traditional Yield Measures	p. 113
Yield to Call	p. 121
Yield to Put	p. 123
Yield to Worst	p. 123
Cash Flow Yield	p. 124
Portfolio Yield Measures	p. 125
Yield Measures for U.S. Treasury Bills	p. 128
Yield Spread Measures Relative to a Spot Rate Curve	p. 134
Concepts Presented in this Chapter	p. 137
Appendix: Mathematics of the Internal Rate of Return	p. 138
Questions	p. 139
Analysis of Floating Rate Securities	p. 141
General Features of Floaters	p. 141
Valuing a Risky Floater	p. 150
Valuation of Floaters with Embedded Options	p. 157
Margin Measures	p. 157
Concepts Presented in this Chapter	p. 166
Questions	p. 167
Valuation of Bonds with Embedded Options	p. 169
Overview of the Valuation of Bonds with Embedded Options	p. 169
Option-Adjusted Spread and Option Cost	p. 170
Lattice Model	p. 172
Binomial Model	p. 175
Illustration	p. 196
Concepts Presented in this Chapter	p. 198
Questions	p. 198
Cash Flow for Mortgage-Backed Securities and Amortizing Asset-Backed Securities	p. 199
Cash Flow of Mortgage-Backed Securities	p. 199
Amortizing Asset-Backed Securities	p. 238
Concepts Presented in this Chapter	p. 242
Questions	p. 244
Valuation of Mortgage-Backed and Asset-Backed Securities	p. 247
Static Cash Flow Yield Analysis	p. 247
Monte Carlo Simulation/OAS	p. 249
Concepts Presented in this Chapter	p. 270
Questions	p. 270
Analysis of Convertible Bonds	p. 273
General Characteristics of Convertible Bonds	p. 273
Tools for Analyzing Convertibles	p. 276
Call and Put Features	p. 278
Convertible Bond Arbitrage	p. 279
Other Types of Convertibles	p. 283
Concepts Presented in this Chapter	p. 285
Questions	p. 285
Total Return	p. 287
Computing the Total Return	p. 287
OAS-Total Return	p. 290
Total Return to Maturity	p. 291
Total Return for a Mortgage-Backed Security	p. 299
Portfolio Total Return	p. 301
Total Return Analysis for Multiple Scenarios	p. 301
Concepts Presented in this Chapter	p. 314
Questions	p. 314
Measuring Interest Rate Risk	p. 317
The Full Valuation Approach	p. 317
Price Volatility Characteristics of Bonds	p. 324
Duration	p. 334
Other Duration Measures	p. 350
Convexity	p. 360
Price Value of a Basis Point	p. 365
The Importance of Yield Volatility	p. 367
Concepts Presented in this Chapter	p. 369
Questions	p. 370
Value-at-Risk Measure and Extensions	p. 373
Value-at-Risk	p. 373
Conditional Value-at-Risk	p. 384
Concepts Presented in this Chapter	p. 385
Questions	p. 386
Analysis of Inflation-Protected Bonds	p. 387
Breakeven Inflation rate	p. 388
Valuation of TIPS	p. 389
Measuring Interest Rate Risk	p. 394
Concepts Presented in this Chapter	p. 397
Questions	p. 397
The Tools of Relative Value Analysis	p. 399
How Portfolio Managers Add Value	p. 399
Yield Spreads over Swap and Treasury Curves	p. 400
Asset Swaps	p. 403
Credit Default Swaps	p. 410
Concepts Presented in this Chapter	p. 413
Questions	p. 414
Analysis of Interest Rate Swaps	p. 417
Description of an Interest Rate Swap	p. 417
Interpreting a Swap Position	p. 419
Terminology, Conventions, and Market Quotes	p. 421
Valuing Interest Rate Swaps	p. 424
Primary Determinants of Swap Spreads	p. 440
Dollar Duration of a Swap	p. 445
Concepts Presented in this Chapter	p. 447
Questions	p. 447
Estimating Yield Volatility	p. 451
Historical Volatility	p. 451
Implied Volatility	p. 455
Forecasting Yield Volatility	p. 459
Concepts Presented in this Chapter	p. 463
Questions	p. 463
Index	p. 465
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