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| Preface | |
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| Acknowledgments | |
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| Introduction | |
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| Overview of the Book | |
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| Overview of Fixed Income Securities and Derivatives | |
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| General Features of Bonds | |
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| Bonds | |
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| Securitized Products | |
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| Preferred Stock | |
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| Interest-Rate Derivatives | |
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| Credit Derivatives | |
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| Summary | |
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| Time Value of Money | |
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| Future Value | |
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| Future Value of an Investment | |
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| Future Value of an Ordinary Annuity | |
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| Summary | |
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| Present Value | |
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| Present Value of a Single Amount to Be Received in the Future | |
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| Present Value for a Fractional Period | |
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| Properties of Present Value | |
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| Present Value of a Series of Future Values | |
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| Present Value of an Ordinary Annuity | |
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| Present Value When the Frequency Is More Than Once Per Year | |
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| Pricing Any Financial Instrument | |
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| Summary | |
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| Continuous Compounding | |
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| Yield (Internal Rate of Return) | |
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| Computing the Yield on Any Investment | |
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| Yield Calculation When There Is Only One Cash Flow | |
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| Annualizing Yields | |
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| Summary | |
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| Bond Pricing for Option-Free Bonds and Conventional Yield Measures | |
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| The Price of a Bond | |
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| Determining the Cash Flows | |
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| Determining the Required Yield | |
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| Pricing a Bond | |
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| Relationship between Required Yield and Price at a Given Time | |
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| Relationships among Coupon Rate, Required Yield, and Price | |
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| Time Path of a Bond | |
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| Analysis of Bond Price Changes | |
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| The Price of a Zero-Coupon Bond | |
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| Price Quotations | |
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| Determining the Price When the Settlement Date Falls between Coupon Periods | |
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| Price Buyer Pays and Price Quotes | |
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| Tax Treatment of Original-Issue Discount Coupon | |
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| Summary | |
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| Conventional Yield and Spread Measures for Bonds | |
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| Current Yield | |
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| Yield to Maturity | |
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| Yield to Call | |
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| Yield to Put | |
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| Yield to Worst | |
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| Portfolio Yield | |
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| Yield Spread Measures | |
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| Summary | |
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| The Yield Curve, Spot Rate Curve, and Forward Rates | |
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| A Bond is a Package of Zero-Coupon Instruments | |
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| The Yield Curve | |
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| The Spot Rate Curve | |
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| Pricing a Bond | |
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| Drawback of Traditional Yield Spread Analysis | |
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| Forward Rates | |
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| Summary | |
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| Return Analysis | |
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| Potential Sources of Dollar Return | |
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| Potential Sources of Dollar Return | |
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| Conventional Measures and the Three Potential Sources of a Bond's Dollar Return | |
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| Computation of the Interest-on-Interest Component of a Bond's Dollar Return | |
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| Bond Characteristics That Affect the Importance of the Interest-on-Interest Component | |
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| Tax Considerations | |
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| Summary and Investment Implications | |
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| Total Return | |
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| Another Look at the Drawbacks of the Yield to Maturity and Yield to Call | |
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| Computing the Total Return for a Bond Held to Maturity | |
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| Computing the Total Return for a Bond to Be Sold Prior to Maturity | |
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| Analyzing Callable Bonds With the Total Return | |
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| After-Tax Total Return to Maturity | |
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| Scenario Analysis | |
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| Application to Cheapest to Deliver for Futures Contract | |
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| Summary and Implications | |
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| Measuring Historical Performance | |
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| Portfolio Period Return | |
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| Averaging Subperiod Returns | |
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| Annualizing Returns | |
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| CFA Institute Performance Presentation Standards | |
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| Summary | |
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| Price Volatility for Option-Free Bonds | |
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| Price Volatility of Properties of Option-Free Bonds | |
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| A Closer Look at the Price/Yield Relationship for Option-Free Bonds | |
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| The Price Volatility Characteristics of Option-Free Bonds | |
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| Characteristics of a Bond That Affect Its Price Volatility | |
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| Measuring Price Volatility Using the Price Value of a Basis Point | |
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| Summary | |
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| Duration as a Measure of Price Volatility | |
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| Macaulay Duration | |
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| Link between Duration and Bond Price Volatility | |
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| Portfolio Duration | |
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| Approximating Duration | |
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| Applications | |
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| Spread Duration | |
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| Total Risk | |
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| Final Note on Duration | |
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| Summary | |
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| Combining Duration and Convexity to Measure Price Volatility | |
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| Estimating Price with Duration: A Graphical Depiction | |
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| Measuring Convexity | |
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| Percentage Price Change Due to Convexity | |
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| Percentage Price Change Due to Duration and Convexity | |
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| Convexity as a Measure of the Change in Dollar Duration | |
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| Summary of Properties of Convexity | |
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| Value of Convexity | |
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| Approximating Convexity: Effective Convexity | |
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| Summary | |
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| Duration and the Yield Curve | |
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| Duration and Nonparallel Yield-Curve Shifts | |
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| Types of Yield-Curve Shifts and Approaches to Measuring Yield-Curve Risk | |
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| Key Rate Durations | |
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| Level, Slope, and Curvature Durations | |
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| Yield-Curve Reshaping Durations | |
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| Summary | |
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| Analyzing Bonds With Embedded Options | |
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| Interest-Rate Models | |
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| Measuring Changes in Interest Rates | |
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| Historical Movements in Interest Rates | |
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| Arbitrage-Free versus Equilibrium Interest-Rate Models | |
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| One-Factor versus Multifactor Models | |
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| One-Factor Models: Normal versus Lognormal | |
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| Applying the Arbitrage-Free Interest-Rate Model | |
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| Summary | |
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| Call Options: Investment and Price Characteristics | |
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| What Is an Option? | |
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| Payoffs from Buying and Selling Options | |
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| The Intrinsic Value and Time Value of an Option | |
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| The Option Price | |
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| Sensitivity of the Theoretical Call Option Price to Changes in Factors | |
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| Duration of an Option | |
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| Summary | |
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| Valuation and Price Volatility of Bonds with Embedded Options | |
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| Price/Yield Relationship for a Callable Bond | |
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| The Components of a Bond with an Embedded Option | |
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| Traditional Valuation Methodology | |
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| Lattice Model for Valuing Bonds with Embedded Options | |
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| Option-Adjusted Spread | |
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| Price Volatility of Bonds with Embedded Options | |
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| Summary | |
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| Credit Risk | |
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| Credit Risk Concepts and Measures for Corporate Bonds | |
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| Types of Credit Risk | |
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| Rating Transition Table | |
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| Measuring Default Rates | |
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| Recovery Rate and Loss Given Default | |
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| Approaches to Credit Risk Modeling | |
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| Financial Ratios Used in Traditional Credit Analysis | |
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| Analyzing Securitized Products | |
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| Measures Used for Securitized Products | |
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| Structured Finance Transactions and Securitization | |
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| Illustration of a Securitization | |
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| Amortizing versus Nonamortizing Assets | |
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| Information Used in the Underwriting Process | |
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| Description of the Pool of Assets | |
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| Prepayment Measures | |
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| Defaults and Delinquencies | |
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| Summary | |
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| Description of Pool of Assets for CSFB Manufactured Housing Pass-Through Certificates, Series 2002-MH3 at the Cut-Off Date | |
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| Composition of the Receivables Pool for Toyota Auto Receivables 1996-A Grantor Trust $722,335,000 6.30% Asset Backed Certificates, Class A | |
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| Composition and Historical Performance of the Sears Portfolio for Sears Credit Account Master Trust II | |
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| Cash Flow Characteristics of Amortizing Loans | |
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| Residential Fixed-Rate, Level-Payment, Fully Amortizing Mortgage Loans | |
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| Residential Adjustable-Rate Mortgages | |
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| Other Loan Types | |
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| Cash Flow Characteristics of Mortgage-Backed Securities | |
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| The Prepayment Option and the Cash Flow | |
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| Overview of Agency Mortgage-Backed Securities | |
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| Cash Flow for an Agency CMO and Stripped MBS | |
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| Cash Flow for Credit-Sensitive MBS | |
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| Summary | |
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| Prepayment Models for Mortgage-Backed Securities | |
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| Agency Prepayment Models | |
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| Nonagency MBS Prepayment Models | |
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| Summary | |
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| Basics of MBS Structuring | |
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| Overview of Structuring | |
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| Structuring for Agency CMOs | |
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| Agency Mortgage Strips | |
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| Credit-Sensitive CMOs | |
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| Summary | |
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| Analysis of Agency Mortgage-Backed Securities | |
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| Static Cash Flow Model | |
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| Monte Carlo Simulation Model | |
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| Market-Based Approaches to Duration Estimation for Agency MBS | |
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| Total Return | |
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| General Approach to ABS Valuation | |
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| Summary | |
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| Statistical and Optimization Techniques | |
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| Basics of Probability Theory and Statistics | |
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| Basic Concepts in Probability Theory | |
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| Basic Rules of Probability Theory | |
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| Random Variable and Probability Distribution | |
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| Discrete versus Continuous Probability Distribution | |
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| Describing a Probability Distribution Function | |
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| Discrete Probability Distributions Used in Credit Risk Modeling | |
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| Continuous Probability Distributions | |
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| Two Applications to Risk Measurement | |
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| Summary | |
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| Regression Analysis | |
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| The Simple Linear Regression Model | |
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| Multiple Linear Regression Model | |
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| Nonlinear Regressions | |
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| Applications of Regression Analysis | |
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| Summary | |
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| Statistical Techniques for Credit Scoring and Risk Factor Identification | |
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| Statistical Techniques for Credit Scoring Models | |
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| Principal Component Analysis | |
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| Summary | |
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| Tracking Error and Multifactor Risk Models | |
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| Tracking Error | |
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| Multifactor Risk Models | |
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| Summary | |
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| Simulation | |
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| Monte Carlo Simulation | |
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| Steps for Monte Carlo Simulation | |
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| Illustration of the Steps of Monte Carlo Simulation | |
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| Application to a Mortgage-Backed Securities Portfolio | |
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| Summary | |
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| Optimization Models | |
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| Mathematical Programming | |
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| Types of Mathematical Programming Models | |
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| Applications | |
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| Summary | |
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| Index | |