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| Preface | |
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| Introduction | |
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| Sectors of the U.S. Bond Market | |
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| Overview of Bond Features | |
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| Risks Associated with Investing in Bonds | |
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| Secondary Market for Bonds | |
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| Financial Innovation and the Bond Market | |
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| Overview of the Book | |
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| Pricing of Bonds | |
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| Review of Time Value of Money | |
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| Pricing a Bond | |
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| Complications | |
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| Pricing Floating-Rate and Inverse-Floating-Rate Securities | |
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| Price Quotes and Accrued Interest | |
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| Summary | |
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| Measuring Yield | |
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| Computing the Yield or Internal Rate of Return on Any Investment | |
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| Conventional Yield Measures | |
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| Potential Sources of a Bond's Dollar Return | |
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| Total Return | |
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| Applications of the Total Return (Horizon Analysis) | |
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| Calculating Yield Changes | |
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| Summary | |
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| Bond Price Volatility | |
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| Review of the Price-Yield Relationship for Option-Free Bonds | |
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| Price Volatility Characteristics of Option-Free Bonds | |
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| Measures of Bond Price Volatility | |
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| Convexity | |
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| Additional Concerns When Using Duration | |
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| Don't Think of Duration as a Measure of Time | |
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| Approximating a Bond's Duration and Convexity Measure | |
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| Measuring a Bond Portfolio's Responsiveness to Nonparallel Changes in Interest Rates | |
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| Summary | |
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| Factors Affecting Bond Yields and the Term Structure of Interest Rates | |
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| Base Interest Rate | |
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| Risk Premium | |
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| Term Structure of Interest Rates | |
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| Summary | |
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| Treasury and Agency Securities Markets | |
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| Treasury Securities | |
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| Stripped Treasury Securities | |
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| Federal Agency Securities | |
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| Summary | |
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| Corporate Debt Instruments | |
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| Corporate Bonds | |
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| Medium-Term Notes | |
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| Commercial Paper | |
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| Bankruptcy and Creditor Rights | |
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| Summary | |
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| Municipal Securities | |
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| Types and Features of Municipal Securities | |
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| Municipal Money Market Products | |
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| Municipal Derivative Securities | |
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| Credit Risk | |
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| Risks Associated with Investing in Municipal Securities | |
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| Yields on Municipal Bonds | |
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| Municipal Bond Market | |
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| The Taxable Municipal Bond Market | |
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| Summary | |
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| Non-U.S. Bonds | |
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| Classification of Global Bond Markets | |
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| Foreign Exchange Risk and Bond Returns | |
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| Eurobond Market | |
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| Non-U.S. Government Bond Markets | |
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| The Pfandbriefe Market | |
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| Emerging Market Bonds | |
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| Summary | |
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| Residential Mortgage Loans | |
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| What Is a Mortgage? | |
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| Participants in the Mortgage Market | |
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| Alternative Mortgage Instruments | |
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| Nonconforming Mortgages | |
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| Risks Associated with Investing in Mortgages | |
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| Summary | |
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| Mortgage Pass-Through Securities | |
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| Cash Flow Characteristics | |
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| WAC and WAM | |
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| Agency Pass-Throughs | |
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| Nonagency Pass-Throughs | |
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| Prepayment Conventions and Cash Flow | |
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| Factors Affecting Prepayments and Prepayment Modeling | |
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| Cash Flow for Nonagency Pass-Throughs | |
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| Cash Flow Yield | |
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| Prepayment Risk and Asset/Liability Management | |
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| Secondary Market Trading | |
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| Summary | |
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| Collateralized Mortgage Obligations and Stripped Mortgage-Backed Securities | |
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| Collateralized Mortgage Obligations | |
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| Stripped Mortgage-Backed Securities | |
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| Summary | |
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| Commercial Mortgage-Backed Securities | |
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| Commercial Mortgage Loans | |
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| Commercial Mortgage-Backed Securities | |
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| Summary | |
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| Asset-Backed Securities | |
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| Creation of an ABS | |
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| Collateral Type and Securitization Structure | |
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| Credit Risks Associated with Investing in ABS | |
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| Review of Several Major Types of ABS | |
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| Summary | |
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| Collateralized Debt Obligations | |
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| Structure of a CDO | |
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| Arbitrage Transactions | |
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| Cash Flow Transactions | |
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| Market Value Transactions | |
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| Synthetic CDOs | |
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| Summary | |
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| Interest-Rate Models | |
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| Mathematical Description of One-Factor Interest-Rate Models | |
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| Arbitrage-Free Versus Equilibrium Models | |
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| Empirical Evidence on Interest-Rate Changes | |
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| Selecting an Interest-Rate Model | |
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| Estimating Interest-Rate Volatility Using Historical Data | |
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| Summary | |
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| Analysis of Bonds with Embedded Options | |
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| Drawbacks of Traditional Yield Spread Analysis | |
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| Static Spread: An Alternative to Yield Spread | |
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| Callable Bonds and Their Investment Characteristics | |
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| Components of a Bond with an Embedded Option | |
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| Valuation Model | |
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| Option-Adjusted Spread | |
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| Effective Duration and Convexity | |
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| Summary | |
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| Analysis of Residential Mortgage-Backed Securities | |
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| Static Cash Flow Yield Methodology | |
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| Monte Carlo Simulation Methodology | |
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| Total Return Analysis | |
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| Summary | |
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| Analysis of Convertible Bonds | |
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| Convertible Bond Provisions | |
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| Minimum Value of a Convertible Bond | |
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| Market Conversion Price | |
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| Current Income of Convertible Bond Versus Stock | |
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| Downside Risk with a Convertible Bond | |
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| Investment Characteristics of a Convertible Bond | |
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| Pros and Cons of Investing in a Convertible Bond | |
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| Types of Investors in Convertible Bonds | |
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| Options Approach | |
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| Summary | |
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| Corporate Bond Credit Analysis | |
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| Overview of Corporate Bond Credit Analysis | |
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| Analysis of Business Risk | |
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| Corporate Governance Risk | |
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| Financial Risk | |
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| Corporate Bond Credit Analysis and Equity Analysis | |
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| Summary | |
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| Appendix A | |
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| Appendix B | |
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| Credit Risk Modeling | |
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| Difficulties in Credit Risk Modeling | |
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| Overview of Credit Risk Modeling | |
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| Credit Ratings Versus Credit Risk Models | |
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| Structural Models | |
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| Reduced-Form Models | |
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| Incomplete Information Models | |
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| Summary | |
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| Active Bond Portfolio Management Strategies | |
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| Overview of the Investment Management Process | |
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| Tracking Error and Bond Portfolio Strategies | |
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| Active Portfolio Strategies | |
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| The Use of Leverage | |
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| Summary | |
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| Indexing | |
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| Objective of and Motivation for Bond Indexing | |
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| Factors to Consider in Selecting an Index | |
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| Bond Indexes | |
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| Indexing Methodologies | |
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| Logistical Problems in Implementing an Indexing Strategy | |
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| Enhanced Indexing | |
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| Summary | |
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| Liability Funding Strategies | |
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| General Principles of Asset/Liability Management | |
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| Immunization of a Portfolio to Satisfy a Single Liability | |
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| Structuring a Portfolio to Satisfy Multiple Liabilities | |
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| Extensions of Liability Funding Strategies | |
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| Combining Active and Immunization Strategies | |
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| Summary | |
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| Bond Performance Measurement and Evaluation | |
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| Requirements for a Bond Performance and Attribution Analysis Process | |
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| Performance Measurement | |
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| Performance Attribution Analysis | |
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| Summary | |
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| Interest-Rate Futures Contracts | |
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| Mechanics of Futures Trading | |
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| Futures Versus Forward Contracts | |
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| Risk and Return Characteristics of Futures Contracts | |
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| Currently Traded Interest-Rate Futures Contracts | |
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| Pricing and Arbitrage in the Interest-Rate Futures Market | |
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| Bond Portfolio Management Applications | |
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| Summary | |
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| Interest-Rate Options | |
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| Options Defined | |
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| Differences Between an Option and a Futures Contract | |
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| Types of Interest-Rate Options | |
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| Intrinsic Value and Time Value of an Option | |
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| Profit and Loss Profiles for Simple Naked Option Strategies | |
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| Put-Call Parity Relationship and Equivalent Positions | |
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| Option Price | |
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| Models for Pricing Options | |
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| Sensitivity of Option Price to Change in Factors | |
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| Hedge Strategies | |
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| Summary | |
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| Interest-Rate Swaps and Agreements | |
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| Interest-Rate Swaps | |
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| Interest-Rate Agreements (Caps and Floors) | |
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| Summary | |
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| Credit Derivatives | |
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| Types of Credit Risk | |
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| Categorization of Credit Derivatives | |
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| ISDA Documentation | |
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| Asset Swaps | |
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| Total Return Swaps | |
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| Credit Default Swaps | |
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| Credit Spread Options | |
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| Credit Spread Forwards | |
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| Structured Credit Products | |
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| Summary | |
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| Index | |