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| Foreword | |
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| Preface | |
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| Introduction to Bonds | |
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| The Bond Instrument | |
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| The Time Value of Money | |
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| Basic Features and Definitions | |
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| Present Value and Discounting | |
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| Discount Factors | |
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| Bond Pricing and Yield: The Traditional Approach | |
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| Bond Pricing | |
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| Bond Yield | |
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| Accrued Interest | |
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| Clean and Dirty Bond Prices | |
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| Day-Count Conventions | |
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| Bond Instruments and Interest Rate Risk | |
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| Duration, Modified Duration, and Convexity | |
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| Duration | |
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| Properties of Macaulay Duration | |
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| Modified Duration | |
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| Convexity | |
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| Bond Pricing and Spot and Forward Rates | |
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| Zero-Coupon Bonds | |
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| Coupon Bonds | |
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| Bond Price in Continuous Time | |
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| Fundamental Concepts | |
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| Stochastic Rates | |
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| Coupon Bonds | |
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| Forward Rates | |
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| Guaranteeing a Forward Rate | |
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| The Spot and Forward Yield Curve | |
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| Calculating Spot Rates | |
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| Term Structure Hypotheses | |
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| The Expectations Hypothesis | |
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| Liquidity Premium Hypothesis | |
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| Segmented Markets Hypothesis | |
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| Interest Rate Modeling | |
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| Basic Concepts | |
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| Short-Rate Processes | |
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| Ito's Lemma | |
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| One-Factor Term-Structure Models | |
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| Vasicek Model | |
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| Hull-White Model | |
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| Further One-Factor Term-Structure Models | |
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| Cox-Ingersoll-Ross (CIR) Model | |
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| Two-Factor Interest Rate Models | |
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| Brennan-Schwartz Model | |
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| Extended Cox-Ingersoll-Ross Model | |
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| Heath-Jarrow-Morton (HJM) Model | |
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| The Multifactor HJM Model | |
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| Choosing a Term-Structure Model | |
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| Fitting the Yield Curve | |
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| Yield Curve Smoothing | |
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| Smoothing Techniques | |
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| Cubic Polynomials | |
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| Non-Parametric Methods | |
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| Spline-Based Methods | |
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| Nelson and Siegel Curves | |
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| Comparing Curves | |
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| Selected Cash and Derivative Instruments | |
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| Forwards and Futures Valuation | |
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| Forwards and Futures | |
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| Cash Flow Differences | |
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| Relationship Between Forward and Futures Prices | |
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| Forward-Spot Parity | |
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| The Basis and Implied Repo Rate | |
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| Swaps | |
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| Interest Rate Swaps | |
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| Market Terminology | |
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| Swap Spreads and the Swap Yield Curve | |
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| Generic Swap Valuation | |
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| Intuitive Swap Valuation | |
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| Zero-Coupon Swap Valuation | |
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| Calculating the Forward Rate from Spot-Rate Discount Factors | |
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| The Key Principles of an Interest Rate Swap | |
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| Valuation Using the Final Maturity Discount Factor | |
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| Non-Plain Vanilla Interest Rate Swaps | |
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| Swaptions | |
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| Valuation | |
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| Interest Rate Swap Applications | |
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| Corporate and Investor Applications | |
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| Hedging Bond Instruments Using Interest Rate Swaps | |
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| Options | |
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| Option Basics | |
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| Terminology | |
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| Option Instruments | |
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| Option Pricing: Setting the Scene | |
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| Limits on Option Prices | |
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| Option Pricing | |
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| The Black-Scholes Option Model | |
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| Assumptions | |
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| Pricing Derivative Instruments Using the Black-Scholes Model | |
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| Put-Call Parity | |
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| Pricing Options on Bonds Using the Black-Scholes Model | |
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| Interest Rate Options and the Black Model | |
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| Comments on the Black-Scholes Model | |
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| Stochastic Volatility | |
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| Implied Volatility | |
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| Other Option Models | |
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| Measuring Option Risk | |
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| Option Price Behavior | |
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| Assessing Time Value | |
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| American Options | |
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| The Greeks | |
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| Delta | |
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| Gamma | |
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| Theta | |
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| Vega | |
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| Rho | |
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| Lambda | |
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| The Option Smile | |
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| Caps and Floors | |
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| Credit Derivatives | |
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| Credit Risk | |
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| Credit Risk and Credit Derivatives | |
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| Applications of Credit Derivatives | |
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| Credit Derivative Instruments | |
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| Credit Default Swap | |
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| Credit Options | |
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| Credit-Linked Notes | |
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| Total Return Swaps | |
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| Investment Applications | |
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| Capital Structure Arbitrage | |
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| Exposure to Market Sectors | |
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| Credit Spreads | |
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| Funding Positions | |
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| Credit-Derivative Pricing | |
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| Pricing Total Return Swaps | |
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| Asset-Swap Pricing | |
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| Credit-Spread Pricing Models | |
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| The Analysis of Bonds with Embedded Options | |
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| Understanding Option Elements Embedded in a Bond | |
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| Basic Options Features | |
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| Option Valuation | |
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| The Call Provision | |
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| The Binomial Tree of Short-Term Interest Rates | |
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| Arbitrage-Free Pricing | |
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| Options Pricing | |
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| Risk-Neutral Pricing | |
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| Recombining and Nonrecombining Trees | |
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| Pricing Callable Bonds | |
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| Price and Yield Sensitivity | |
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| Measuring Bond Yield Spreads | |
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| Price Volatility of Bonds with Embedded Options | |
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| Effective Duration | |
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| Effective Convexity | |
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| Sinking Funds | |
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| Inflation-Indexed Bonds | |
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| Basic Concepts | |
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| Choice of Index | |
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| Indexation Lag | |
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| Coupon Frequency | |
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| Type of Indexation | |
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| Index-Linked Bond Cash Flows and Yields | |
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| TIPS Cash Flow Calculations | |
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| TIPS Price and Yield Calculations | |
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| Assessing Yields on Index-Linked Bonds | |
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| Which to Hold: Indexed or Conventional Bonds? | |
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| Analysis of Real Interest Rates | |
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| Indexation Lags and Inflation Expectations | |
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| An Inflation Term Structure | |
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| Hybrid Securities | |
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| Floating-Rate Notes | |
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| Inverse Floating-Rate Notes | |
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| Hedging Inverse Floaters | |
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| Indexed Amortizing Notes | |
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| Advantages for Investors | |
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| Synthetic Convertible Notes | |
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| Investor Benefits | |
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| Interest Differential Notes | |
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| Benefits for Investors | |
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| Securitization and Mortgage-Backed Securities | |
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| Reasons for Undertaking Securitization | |
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| Market Participants | |
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| Securitizing Mortgages | |
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| Growth of the Market | |
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| Types of Mortgages and Their Cash Flows | |
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| Mortgage Bond Risk | |
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| Types of Mortgage-Backed Securities | |
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| Cash Flow Patterns | |
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| Prepayment Analysis | |
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| Prepayment Models | |
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| Collateralized Mortgage Securities | |
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| Sequential Pay | |
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| Planned Amortization Class | |
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| Targeted Amortization Class | |
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| Z-Class Bonds | |
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| Interest-Only and Principal-Only Classes | |
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| Nonagency CMO Bonds | |
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| Credit Enhancements | |
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| Commercial Mortgage-Backed Securities | |
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| Issuing a CMBS | |
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| Types of CMBS Structures | |
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| Evaluation and Analysis of Mortgage-Backed Bonds | |
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| Term to Maturity | |
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| Calculating Yield and Price: Static Cash Flow Model | |
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| Bond Price and Option-Adjusted Spread | |
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| Effective Duration and Convexity | |
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| Total Return | |
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| Price-Yield Curves of Mortgage Pass-Through, PO, and IO Securities | |
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| Collateralized Debt Obligations | |
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| CDO Structures | |
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| Conventional CDO Structures | |
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| Synthetic CDO Structures | |
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| Motivation Behind CDO Issuance | |
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| Balance Sheet-Driven Transactions | |
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| Investor-Driven Arbitrage Transactions | |
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| Analysis and Evaluation | |
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| Portfolio Characteristics | |
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| Cash Flow Analysis and Stress Testing | |
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| Originator's Credit Quality | |
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| Operational Aspects | |
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| Review of Credit-Enhancement Mechanisms | |
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| Legal Structure of the Transaction | |
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| Expected Loss | |
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| Selected Market Trading Considerations | |
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| The Yield Curve, Bond Yield, and Spot Rates | |
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| Practical Uses of Redemption Yield and Duration | |
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| The Concept of Yield | |
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| Yield Comparisons in the Market | |
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| Measuring a Bond's True Return | |
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| Implied Spot Rates and Market Zero-Coupon Yields | |
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| Spot Yields and Coupon-Bond Prices | |
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| Implied Spot Yields and Zero-Coupon Bond Yields | |
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| Determining Strip Values | |
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| Strips Market Anomalies | |
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| Strips Trading Strategy | |
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| Case Study: Treasury Strip Yields and Cash Flow Analysis | |
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| Approaches to Trading | |
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| Futures Trading | |
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| Yield Curves and Relative Value | |
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| Determinants of Government Bond Yields | |
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| Characterizing the Complete Term Structure | |
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| Identifying Relative Value in Government Bonds | |
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| Hedging Bond Positions | |
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| Simple Hedging Approaches | |
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| Hedge Analysis | |
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| Summary of the Derivation of the Optimum-Hedge Equation | |
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| The Black-Scholes Model in Microsoft Excel | |
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| References | |
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| Index | |