You are previewing Bond Math: The Theory Behind the Formulas, + Website, 2nd Edition.
O'Reilly logo
Bond Math: The Theory Behind the Formulas, + Website, 2nd Edition

Book Description

A bond calculation quick reference, complete with context and application insights

Bond Math is a quick and easy resource that puts the intricacies of bond calculations into a clear and logical order. This simple, readable guide provides a handy reference, teaching the reader how to think about the essentials of bond math. Much more than just a book of formulas, the emphasis is on how to think about bonds and the associated math, with plenty of examples, anecdotes, and thought-provoking insights that sometimes run counter to conventional wisdom. This updated second edition includes popular Bloomberg pages used in fixed-income analysis, including the Yield and Spread Analysis page, plus a companion website complete with an Online Workbook of multiple choice questions and answers and spreadsheet exercises. Detailed coverage of key calculations, including thorough explanations, provide practical guidance to working bond professionals.

The bond market is the largest and most liquid in the world, encompassing everything from Treasuries and investment grade corporate paper to municipals and junk bonds, trading over $900 billion daily in the U.S. alone. Bond Math is a guide to the inevitable calculations involved in managing bonds, with expert insight on the portfolios and investment strategies that puts the math in perspective. Clear and concise without sacrificing detail, this book helps readers to:

  • Delineate the characteristics of different types of debt securities

  • Calculate implied forward and spot rates and discount factors

  • Work with rates of return, yield statistics, and interest rate swaps

  • Understand duration-based risk measures, and more

  • Memorizing formulas is one thing, but really learning how to mentally approach the math behind bonds is something else entirely. This approach places calculations in context, and enables easier transition from theory to application. For the bond professional seeking a quick math reference, Bond Math provides that and so much more.

    Table of Contents

    1. Preface to the Second Edition
    2. Preface to the First Edition
    3. CHAPTER 1 Money Market Interest Rates
      1. Interest Rates in Textbook Theory
      2. Money Market Add-On Rates
      3. Money Market Discount Rates
      4. Two Cash Flows, Many Money Market Rates
      5. A History Lesson on Money Market Certificates
      6. Periodicity Conversions
      7. Treasury Bill Auction Results
      8. The Future: Hourly Interest Rates?
      9. Conclusion
    4. CHAPTER 2 Zero-Coupon Bonds
      1. The Story of TIGRS, CATS, LIONS, and STRIPS
      2. Yields to Maturity on Zero-Coupon Bonds
      3. Horizon Yields and Holding-Period Rates of Return
      4. Changes in Bond Prices and Yields
      5. Credit Spreads and the Implied Probability of Default
      6. Conclusion
    5. CHAPTER 3 Prices and Yields on Coupon Bonds
      1. Market Demand and Supply
      2. Bond Prices and Yields to Maturity in a World of No Arbitrage
      3. Some Other Yield Statistics
      4. Horizon Yields
      5. Some Uses of Yield-to-Maturity Statistics
      6. Implied Probability of Default on Coupon Bonds
      7. Bond Pricing between Coupon Dates
      8. A Real Corporate Bond
      9. Conclusion
    6. CHAPTER 4 Bond Taxation
      1. Basic Bond Taxation
      2. Market Discount Bonds
      3. A Real Market Discount Corporate Bond
      4. Premium Bonds
      5. Original Issue Discount Bonds
      6. Municipal Bonds
      7. Conclusion
    7. CHAPTER 5 Yield Curves
      1. An Intuitive Forward Curve
      2. Classic Theories of the Term Structure of Interest Rates
      3. Accurate Implied Forward Rates
      4. Money Market Implied Forward Rates
      5. Calculating and Using Implied Spot (Zero-Coupon) Rates
      6. More Applications for the Implied Spot and Forward Curves
      7. Discount Factors
      8. Conclusion
    8. CHAPTER 6 Duration and Convexity
      1. Yield Duration and Convexity Relationships
      2. Yield Duration
      3. The Relationship between Yield Duration and Maturity
      4. Yield Convexity
      5. Bloomberg Yield Duration and Convexity
      6. Curve Duration and Convexity
      7. Conclusion
    9. CHAPTER 7 Floaters and Linkers
      1. Floating-Rate Notes in General
      2. A Simple Floater Valuation Model
      3. A Somewhat More Complex Floater Valuation Model
      4. An Actual Floater
      5. Inflation-Indexed Bonds: C-Linkers and P-Linkers
      6. Linker Taxation
      7. Linker Duration
      8. Conclusion
    10. CHAPTER 8 Interest Rate Swaps
      1. Pricing an Interest Rate Swap
      2. Interest Rate Forwards and Futures
      3. Inferring the Forward Curve
      4. Valuing an Interest Rate Swap
      5. Interest Rate Swap Duration
      6. Collateralized Swaps
      7. Traditional LIBOR Discounting
      8. OIS Discounting
      9. The LIBOR Forward Curve for OIS Discounting
      10. Conclusion
    11. CHAPTER 9 Bond Portfolios
      1. Bond Portfolio Statistics in Theory
      2. Bond Portfolio Statistics in Practice
      3. A Real Bond Portfolio
      4. Thoughts on Bond Portfolio Statistics
      5. Conclusion
    12. CHAPTER 10 Bond Strategies
      1. Acting on a Rate View
      2. An Interest Rate Swap Overlay Strategy
      3. Classic Immunization Theory
      4. Immunization Implementation Issues
      5. Liability-Driven Investing
      6. Closing Thoughts: Target-Duration Bond Funds
    13. Technical Appendix
      1. Chapter 1 Money Market Interest Rates
      2. Chapter 3 Prices and Yields on Coupon Bonds
      3. Chapter 6 Duration and Convexity
      4. Chapter 7 Floaters and Linkers
      5. Chapter 9 Bond Portfolios
    14. Acronyms
    15. Bibliographic Notes
      1. Chapter 1 Money Market Interest Rates
      2. Chapter 2 Zero-Coupon Bonds
      3. Chapter 3 Prices and Yields on Coupon Bonds
      4. Chapter 4 Bond Taxation
      5. Chapter 5 Yield Curves
      6. Chapter 6 Duration and Convexity
      7. Chapter 7 Floaters and Linkers
      8. Chapter 8 Interest Rate Swaps
      9. Chapter 9 Bond Portfolios
      10. Chapter 10 Bond Strategies
    16. About the Author
    17. Acknowledgments
    18. About the Companion Website
    19. Index
    20. End User License Agreement