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Bonds and Bond Derivatives, Second Edition

Book Description

This book provides an introduction to bond markets and bond derivatives for students as well as for executives in commercial businesses and financial institutions. It also:

  • Presents the essential elements of debt instruments in an intuitive manner;

  • Covers updated institutional material, new sections on callable bonds and the yield to call, convertible bonds, and methods for estimating and modern models of term structure of interest rates, as well as a comprehensive discussion of bonds in the European Economic Union;

  • Includes additional end-of-chapter questions, PowerPoint slides, and an Instructor's text bank through the author's website: http://bear.cba.ufl.edu/livingston

Table of Contents

  1. Cover Page
  2. Dedication
  3. Title Page
  4. Copyright
  5. Contents
  6. PREFACE
  7. ACKNOWLEDGEMENTS
  8. INTRODUCTION
    1. Growth of Debt
    2. Increased Variability of Interest Rates
    3. New Varieties of Debt
    4. Plan of the Book
  9. 1: DETERMINANTS OF THE LEVEL OF INTEREST RATES
    1. Federal Reserve
    2. Foreign Central Banks
    3. Loanable Funds Approach
    4. Inflation and Interest Rates
    5. Summary
    6. Questions and Problems
  10. 2: ISSUERS
    1. The US Treasury
    2. Index-Linked Bonds
    3. Government-Sponsored Enterprises
    4. Municipal Securities
    5. Mortgages
    6. Corporations
    7. Summary
    8. Questions and Problems
  11. 3: FINANCIAL INTERMEDIARIES
    1. Initial Sale of Securities (Primary Market)
    2. Dealers and Brokers (Secondary Market)
    3. Mutual Funds
    4. Insurance Companies
    5. Pension Funds
    6. Commercial Banks and Thrifts
    7. Comparing Types of Debt Financing
    8. Summary
    9. Questions and Problems
  12. 4: TIME VALUES
    1. A Time Line
    2. Future Value
    3. Present Value
    4. Finding Future Value from Present Value
    5. Price of a Bond
    6. Bond Yield to Maturity
    7. Other Yield Measures
    8. Perpetual Bonds
    9. Holding Period Returns
    10. Semiannual Interest
    11. Accrued Interest
    12. Newspaper and Internet Quotes
    13. Summary
    14. Notes
    15. Questions and Problems
    16. Appendix
  13. 5: MONEY MARKET INSTRUMENTS AND RATES
    1. Money Market Instruments
    2. Money Market Rates
    3. Summary
    4. Questions and Problems
  14. 6: THE RISK OF CHANGING INTEREST RATES
    1. Duration
    2. Immunization at a Horizon Date
    3. Immunizing Assets and Liabilities
    4. Summary
    5. Note
    6. Questions and Problems
    7. Appendix
  15. 7: TIME VALUE WITH NONFLAT TERM STRUCTURE
    1. Spot Interest Rates
    2. Present Values or Spot Prices
    3. Treasury Strips
    4. Forward Interest Rates
    5. Shape of the Term Structure
    6. Annuities
    7. Prices of Coupon-Bearing Bonds
    8. Yield to Maturity and Spot Rates
    9. Methods for Estimating the Term Structure of Interest Rates
    10. Summary
    11. Questions and Problems
    12. Appendix
  16. 8: ARBITRAGE
    1. Shortselling
    2. Conditions for Arbitrage
    3. Arbitrage and Present Values
    4. Arbitrage and Bond Coupons
    5. An Example Where Cumulative Cash Flows Matter
    6. An Example of a Replicating Portfolio
    7. Creating Forward Contracts from Spot Securities
    8. Arbitrage and Forward Interest Rates
    9. Arbitrage Proof of Linear Relationship between Bond Price and Coupon
    10. Finding Arbitrage Opportunities
    11. Summary
    12. Note
    13. Questions and Problems
  17. 9: TERM STRUCTURE OF INTEREST RATES
    1. Historical Patterns in Yield Curves
    2. Segmented Markets Theory
    3. Increasing Liquidity Premiums
    4. Preferred Habitat
    5. Money Substitute
    6. Expectations Hypothesis
    7. Combined Theory
    8. Humpbacked Curves
    9. Holding Period Returns
    10. Modern Term Structure Models
    11. Summary
    12. Notes
    13. Questions and Problems
  18. 10: DEFAULT RISK
    1. Default on Municipal Bonds
    2. Default on Mortgages
    3. Corporate Bonds
    4. Bond Ratings
    5. High-Yield (Junk) Bonds
    6. Summary
    7. Questions and Problems
  19. 11: PUT AND CALL OPTIONS
    1. Call Options
    2. Put Options
    3. Put–Call Parity
    4. Determinants of the Value of a Call Option
    5. Employee Stock Options
    6. Summary
    7. Notes
    8. Questions and Problems
  20. 12: CALL FEATURES ON BONDS
    1. Reasons for Calling a Bond
    2. Embedded Options
    3. Yield to Call
    4. Refunding
    5. The Timing of Refunding
    6. The Existence of Call Provisions
    7. Callable Debt versus Short-Term Debt
    8. Advance Refundings
    9. Refunding Discounted Debt
    10. Sinking Funds
    11. Refunding Municipal Bonds
    12. Summary
    13. Questions and Problems
  21. 13: MORTGAGES
    1. Mortgage Mathematics
    2. Variable-Rate Mortgages
    3. Assumable Mortgages
    4. The Prepayment Option
    5. Marketable Mortgages
    6. Default and Mortgage Guarantees
    7. Derivative Mortgage Products
    8. Summary
    9. Questions and Problems
  22. 14: FUTURES CONTRACTS
    1. Open Interest
    2. Margin and Marking-to-Market
    3. Forward versus Futures Contracts
    4. Determinants of Futures Prices
    5. Speculative Futures Positions
    6. Hedging with Futures Contracts
    7. Summary
    8. Notes
    9. Questions and Problems
  23. 15: BOND FUTURES
    1. Treasury Bond Futures
    2. Comparison with Other Futures Contracts
    3. Hedging with Financial Futures
    4. Cheapest Deliverable Bond
    5. Invoice price
    6. Other Aspects of the Delivery Process
    7. Summary
    8. Notes
    9. Questions and Problems
  24. 16: OTHER DERIVATIVES
    1. Floating-Rate Notes
    2. Interest Rate Swaps
    3. Convertible Bonds
    4. Preferred Stock
    5. Summary
    6. Notes
    7. Questions and Problems
  25. 17: EXCHANGE RATES AND INTERNATIONAL INVESTMENTS
    1. International Investment
    2. Exchange Rates
    3. Impact of Changing Exchange Rates on Imports and Exports
    4. Exchange Rates and Investment Returns
    5. Inflation, Interest Rates, and Exchange Rates
    6. Spot and Forward Exchange Rates
    7. Covered Interest Arbitrage
    8. Time Series Properties of Exchange Rates
    9. International Bond Markets
    10. Summary
    11. Questions and Problems
  26. SELECTED REFERENCES
  27. INDEX