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Fixed Income Analysis, Second Edition

Book Description

In the Second Edition of Fixed Income Analysis, financial expert Frank Fabozzi and a team of knowledgeable contributors provide complete coverage of the most important issues in fixed income analysis.

Now, in Fixed Income Analysis, Second Edition, Fabozzi offers you a wealth of practical information and exercises that will solidify your understanding of the tools and techniques associated with this discipline. This comprehensive study guide--which parallels the main book chapter by chapter--contains challenging problems and a complete set of solutions as well as concise learning outcome statements and summary overviews.

If you want to make the most of your time in the fixed income marketplace, the lessons within this workbook can show you how. Topics reviewed include:

  • The risks associated with investing in fixed income securities

  • The fundamentals of valuation and interest rate risk

  • The features of structured products--such as mortgage-backed securities and asset-backed securities

  • The principles of credit analysis

  • The valuation of fixed income securities with embedded options

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Foreword
  4. Acknowledgements
    1. First Edition (Reprinted from First Edition)
    2. Second Edition
  5. Introduction
    1. PARENTAGE
    2. BENEFITS
    3. CONVENTIONAL WISDOM
    4. THE TEXTS
  6. NOTE ON ROUNDING DIFFERENCES
  7. CHAPTER 1 - FEATURES OF DEBT SECURITIES
    1. I. INTRODUCTION
    2. II. INDENTURE AND COVENANTS
    3. III. MATURITY
    4. IV. PAR VALUE
    5. V. COUPON RATE
    6. VI. PROVISIONS FOR PAYING OFF BONDS
    7. VII. CONVERSION PRIVILEGE
    8. VIII. PUT PROVISION
    9. IX. CURRENCY DENOMINATION
    10. X. EMBEDDED OPTIONS
    11. XI. BORROWING FUNDS TO PURCHASE BONDS
  8. CHAPTER 2 - RISKS ASSOCIATED WITH INVESTING IN BONDS
    1. I. INTRODUCTION
    2. II. INTEREST RATE RISK
    3. III. YIELD CURVE RISK
    4. IV. CALL AND PREPAYMENT RISK
    5. V. REINVESTMENT RISK
    6. VI. CREDIT RISK
    7. VII. LIQUIDITY RISK
    8. VIII . EXCHANGE RATE OR CURRENCY RISK
    9. IX. INFLATION OR PURCHASING POWER RISK
    10. X. VOLATILITY RISK
    11. XI. EVENT RISK
    12. XII. SOVEREIGN RISK
  9. CHAPTER 3 - OVERVIEW OF BOND SECTORS AND INSTRUMENTS
    1. I. INTRODUCTION
    2. II. SECTORS OF THE BOND MARKET
    3. III. SOVEREIGN BONDS
    4. IV. SEMI-GOVERNMENT / AGENCY BONDS
    5. V. STATE AND LOCAL GOVERNMENTS
    6. VI. CORPORATE DEBT SECURITIES
    7. VII. ASSET-BACKED SECURITIES
    8. VIII. COLLATERALIZED DEBT OBLIGATIONS
    9. IX . PRIMARY MARKET AND SECONDARY MARKET FOR BONDS
  10. CHAPTER 4 - UNDERSTANDING YIELD SPREADS
    1. I. INTRODUCTION
    2. II. INTEREST RATE DETERMINATION
    3. III. U.S. TREASURY RATES
    4. IV. YIELDS ON NON-TREASURY SECURITIES
    5. V. NON-U.S. INTEREST RATES
    6. VI. SWAP SPREADS
  11. CHAPTER 5 - INTRODUCTION TO THE VALUATION OF DEBT SECURITIES
    1. I. INTRODUCTION
    2. II. GENERAL PRINCIPLES OF VALUATION
    3. III. TRADITIONAL APPROACH TO VALUATION
    4. IV. THE ARBITRAGE-FREE VALUATION APPROACH
    5. V. VALUATION MODELS
  12. CHAPTER 6 - YIELD MEASURES, SPOT RATES, AND FORWARD RATES
    1. I. INTRODUCTION
    2. II. SOURCES OF RETURN
    3. III. TRADITIONAL YIELD MEASURES
    4. IV. THEORETICAL SPOT RATES
    5. V. FORWARD RATES
  13. CHAPTER 7 - INTRODUCTION TO THE MEASUREMENT OF INTEREST RATE RISK
    1. I. INTRODUCTION
    2. II. THE FULL VALUATION APPROACH
    3. III. PRICE VOLATILITY CHARACTERISTICS OF BONDS
    4. IV. DURATION
    5. V. CONVEXITY ADJUSTMENT
    6. VI. PRICE VALUE OF A BASIS POINT
    7. VII. THE IMPORTANCE OF YIELD VOLATILITY
  14. CHAPTER 8 - TERM STRUCTURE AND VOLATILITY OF INTEREST RATES
    1. I. INTRODUCTION
    2. II. HISTORICAL LOOK AT THE TREASURY YIELD CURVE
    3. III. TREASURY RETURNS RESULTING FROM YIELD CURVE MOVEMENTS
    4. IV. CONSTRUCTING THE THEORETICAL SPOT RATE CURVE FOR TREASURIES
    5. V. THE SWAP CURVE (LIBOR CURVE)
    6. VI. EXPECTATIONS THEORIES OF THE TERM STRUCTURE OF INTEREST RATES
    7. VII. MEASURING YIELD CURVE RISK
    8. VIII. YIELD VOLATILITY AND MEASUREMENT
  15. CHAPTER 9 - VALUING BONDS WITH EMBEDDED OPTIONS
    1. I. INTRODUCTION
    2. II. ELEMENTS OF A BOND VALUATION MODEL
    3. III. OVERVIEW OF THE BOND VALUATION PROCESS
    4. IV. REVIEW OF HOW TO VALUE AN OPTION-FREE BOND
    5. V. VALUING A BOND WITH AN EMBEDDED OPTION USING THE BINOMIAL MODEL
    6. VI. VALUING AND ANALYZING A CALLABLE BOND
    7. VII. VALUING A PUTABLE BOND
    8. VIII. VALUING A STEP-UP CALLABLE NOTE
    9. IX. VALUING A CAPPED FLOATER
    10. X. ANALYSIS OF CONVERTIBLE BONDS
  16. CHAPTER 10 - MORTGAGE-BACKED SECTOR OF THE BOND MARKET
    1. I. INTRODUCTION
    2. II. RESIDENTIAL MORTGAGE LOANS
    3. III. MORTGAGE PASSTHROUGH SECURITIES
    4. IV. COLLATERALIZED MORTGAGE OBLIGATIONS
    5. V. STRIPPED MORTGAGE-BACKED SECURITIES
    6. VI. NONAGENCY RESIDENTIAL MORTGAGE-BACKED SECURITIES
    7. VII. COMMERCIAL MORTGAGE-BACKED SECURITIES
  17. CHAPTER 11 - ASSET-BACKED SECTOR OF THE BOND MARKET
    1. I. INTRODUCTION
    2. II. THE SECURITIZATION PROCESS AND FEATURES OF ABS
    3. III. HOME EQUITY LOANS
    4. IV. MANUFACTURED HOUSING-BACKED SECURITIES
    5. V. RESIDENTIAL MBS OUTSIDE THE UNITED STATES
    6. VI. AUTO LOAN-BACKED SECURITIES
    7. VII. STUDENT LOAN-BACKED SECURITIES
    8. VIII. SBA LOAN-BACKED SECURITIES
    9. IX. CREDIT CARD RECEIVABLE-BACKED SECURITIES
    10. X. COLLATERALIZED DEBT OBLIGATIONS
  18. CHAPTER 12 - VALUING MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
    1. I. INTRODUCTION
    2. II. CASH FLOW YIELD ANALYSIS
    3. III. ZERO-VOLATILITY SPREAD
    4. IV. MONTE CARLO SIMULATION MODEL AND OAS
    5. V. MEASURING INTEREST RATE RISK
    6. VI. VALUING ASSET-BACKED SECURITIES
    7. VII. VALUING ANY SECURITY
  19. CHAPTER 13 - INTEREST RATE DERIVATIVE INSTRUMENTS
    1. I. INTRODUCTION
    2. II . INTEREST RATE FUTURES
    3. III. INTEREST RATE OPTIONS
    4. IV. INTEREST RATE SWAPS
    5. V. INTEREST RATE CAPS AND FLOORS
  20. CHAPTER 14 - VALUATION OF INTEREST RATE DERIVATIVE INSTRUMENTS
    1. I. INTRODUCTION
    2. II. INTEREST RATE FUTURES CONTRACTS
    3. III. INTEREST RATE SWAPS
    4. IV. OPTIONS
    5. V. CAPS AND FLOORS
  21. CHAPTER 15 - GENERAL PRINCIPLES OF CREDIT ANALYSIS
    1. I. INTRODUCTION
    2. II. CREDIT RATINGS
    3. III . TRADITIONAL CREDIT ANALYSIS
    4. IV. CREDIT SCORING MODELS
    5. V. CREDIT RISK MODELS
    6. APPENDIX: CASE STUDY: BERGEN BRUNSWIG CORPORATION
    7. I. BACKGROUND INFORMATION
    8. II. ANALYSIS
    9. III. CONCLUSION
  22. CHAPTER 16 - INTRODUCTION TO BOND PORTFOLIO MANAGEMENT
    1. I. INTRODUCTION
    2. II. SETTING INVESTMENT OBJECTIVES FOR FIXED-INCOME INVESTORS
    3. III. DEVELOPING AND IMPLEMENTING A PORTFOLIO STRATEGY
    4. IV. MONITORING THE PORTFOLIO
    5. V. ADJUSTING THE PORTFOLIO
  23. CHAPTER 17 - MEASURING A PORTFOLIO'S RISK PROFILE
    1. I. INTRODUCTION
    2. II. REVIEW OF STANDARD DEVIATION AND DOWNSIDE RISK MEASURES
    3. III. TRACKING ERROR
    4. IV. MEASURING A PORTFOLIO'S INTEREST RATE RISK
    5. V. MEASURING YIELD CURVE RISK
    6. VI. SPREAD RISK
    7. VII. CREDIT RISK
    8. VIII. OPTIONALITY RISK FOR NON-MBS
    9. IX. RISKS OF INVESTING IN MORTGAGE-BACKED SECURITIES
    10. X. MULTI-FACTOR RISK MODELS
  24. CHAPTER 18 - MANAGING FUNDS AGAINST A BOND MARKET INDEX
    1. I. INTRODUCTION
    2. II. DEGREES OF ACTIVE MANAGEMENT
    3. III. STRATEGIES
    4. IV. SCENARIO ANALYSIS FOR ASSESSING POTENTIAL PERFORMANCE
    5. V. USING MULTI-FACTOR RISK MODELS IN PORTFOLIO CONSTRUCTION
    6. VI. PERFORMANCE EVALUATION
    7. VII. LEVERAGING STRATEGIES
  25. CHAPTER 19 - PORTFOLIO IMMUNIZATION AND CASH FLOW MATCHING
    1. I. INTRODUCTION
    2. II. IMMUNIZATION STRATEGY FOR A SINGLE LIABILITY
    3. III. CONTINGENT IMMUNIZATION
    4. IV. IMMUNIZATION FOR MULTIPLE LIABILITIES
    5. V. CASH FLOW MATCHING FOR MULTIPLE LIABILITIES
  26. CHAPTER 20 - RELATIVE-VALUE METHODOLOGIES FOR GLOBAL CREDIT BOND PORTFOLIO MANAGEMENT
    1. I. INTRODUCTION
    2. II. CREDIT RELATIVE-VALUE ANALYSIS
    3. III. TOTAL RETURN ANALYSIS
    4. IV. PRIMARY MARKET ANALYSIS
    5. V. LIQUIDITY AND TRADING ANALYSIS
    6. VI. SECONDARY TRADE RATIONALES
    7. VII. SPREAD ANALYSIS
    8. VIII. STRUCTURAL ANALYSIS
    9. IX. CREDIT CURVE ANALYSIS
    10. X . CREDIT ANALYSIS
    11. XI. ASSET ALLOCATION/SECTOR ROTATION
  27. CHAPTER 21 - INTERNATIONAL BOND PORTFOLIO MANAGEMENT
    1. I. INTRODUCTION
    2. II. INVESTMENT OBJECTIVES AND POLICY STATEMENTS
    3. III. DEVELOPING A PORTFOLIO STRATEGY
    4. IV. PORTFOLIO CONSTRUCTION
    5. APPENDIX
  28. CHAPTER 22 - CONTROLLING INTEREST RATE RISK WITH DERIVATIVES
    1. I . INTRODUCTION
    2. II. CONTROLLING INTEREST RATE RISK WITH FUTURES
    3. III. CONTROLLING INTEREST RATE RISK WITH SWAPS
    4. IV. HEDGING WITH OPTIONS
    5. V. USING CAPS AND FLOORS
  29. CHAPTER 23 - HEDGING MORTGAGE SECURITIES TO CAPTURE RELATIVE VALUE
    1. I. INTRODUCTION
    2. II. THE PROBLEM
    3. III. MORTGAGE SECURITY RISKS
    4. IV. HOW INTEREST RATES CHANGE OVER TIME
    5. V. HEDGING METHODOLOGY
    6. VI . HEDGING CUSPY-COUPON MORTGAGE SECURITIES
  30. CHAPTER 24 - CREDIT DERIVATIVES IN BOND PORTFOLIO MANAGEMENT
    1. I . INTRODUCTION
    2. II. MARKET PARTICIPANTS
    3. III. WHY CREDIT RISK IS IMPORTANT
    4. IV. TOTAL RETURN SWAP
    5. V. CREDIT DEFAULT PRODUCTS
    6. VI. CREDIT SPREAD PRODUCTS
    7. VII. SYNTHETIC COLLATERALIZED DEBT OBLIGATIONS
    8. VIII. BASKET DEFAULT SWAPS
  31. ABOUT THE CFA PROGRAM
  32. ABOUT THE AUTHOR
  33. ABOUT THE CONTRIBUTORS
  34. Index