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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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| Floating Rate Notes | |
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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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| Liquidiry 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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| Shore-Rare Processes | |
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| Ico'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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| Fitting the Term Structure of Interest Rates: The Practical Implementation of Cubic Spline Methodology | |
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| Cubic Spline Methodology | |
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| The Hypothesis | |
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| Practical Approach | |
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| A Working Environment | |
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| The First Requirement | |
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| The Second Requirement | |
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| The Third Requirement | |
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| Meeting All Requirements Simultaneously | |
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| A Unique Solution | |
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| The Solution | |
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| A Look at Forward Rates | |
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| Conclusion | |
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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 Rare 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 Pricing | |
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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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| Lamda | |
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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 Derivatives and Relative Value Trading | |
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| Relative Value Trading Straregies | |
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| Bond Valuation from CDS Prices: Bloomberg Screen VCDS | |
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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 Market Approach to CDS Pricing | |
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| Default Probabilities | |
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| Pricing a CDS Contract | |
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| Example Calculation | |
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| The ITraxx and CD-X Credit Indices Contracts | |
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| Index Tranche Market | |
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| Impact of the 2007-2008 Credit Crunch: New CDS Contracts | |
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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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| Option-Adjusted Spread Analysis | |
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| Introduction | |
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| A Theoretical Framework | |
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| The Methodology in Practice | |
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| Convertible Bonds | |
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| Basic Features | |
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| Trading Patterns of Convertible Bonds | |
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| Investor Analysis | |
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| Zero-Coupon Convertibles | |
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| Convertible Bond Default Risk | |
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| Advantages of Issuing and Holding Convertibles | |
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| Convertible Bond Valuation | |
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| Fair Value of a Convertible Bond: The Binomial Model | |
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| Model Parameters | |
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| Pricing Spreadsheet | |
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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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| Inflation-Indexed Derivatives | |
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| Securitization and Asset-Backed Securities | |
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| The Concept of Securitization | |
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| Reasons for Undertaking Securitization | |
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| Benefits of Securitization to Investors | |
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| The Process of Securitization | |
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| Securitization Process | |
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| Credit Enhancement | |
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| Securirizing Mortgages | |
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| Growth of the Market | |
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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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| ABS Structures: A Primer on Performance Metrics and Test Measures | |
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| Collateral Types | |
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| Summary of Performance Metrics | |
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| Securitization: Features of the 2007-2009 Financial Crisis | |
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| Impact of the Credit Crunch | |
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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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| Legal Structure of the Transaction | |
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| Expected Loss | |
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| CDO Market Overview Since 2005 | |
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| Risk and Capital Management | |
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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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| Illustrating Bond Yield Using a Microsoft Excel Spreadsheet | |
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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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| Credit Analysis and Relative Value Measurement | |
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| Credit Ratings | |
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| Purpose of Credit Ratings | |
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| Formal Credit Ratings | |
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| Credit Analysis | |
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| The Issuer Indusrry | |
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| Financial Analysis | |
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| Industry-Specific Analysis | |
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| Utility Companies | |
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| Financial Sector Companies | |
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| The Art of Credit Analysis | |
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| Bond Spreads and Relative Value | |
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| Bond Spreads | |
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| Summary of Fund Managers' Approach to Value Creation | |
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| The Black-Scholes Model in Microsoft Excel | |
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| Iterative Formula Spreadsheet | |
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| Pricing Spreadsheet | |
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| References | |
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| About the Author | |
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| Index | |