Introduction to Fixed Income Analytics: Relative Value Analysis, Risk Measures and Valuation / Edition 2

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To remain a competitive fixed income investor, both seasonedprofessionals and newcomers must stay up to date and knowledgeableabout this continually evolving field.

Nobody understands this better than fixed income experts FrankFabozzi and Steven Mann. And now, with the revised and updatedIntroduction to Fixed Income Analytics, Second Edition, theyprovide complete coverage of the most important issues in thisarea. Following in the footsteps of the popular first edition, thisreliable resource skillfully details the key analytical conceptsused in the fixed income market and illustrates how they arecomputed.

This book addresses everything from the valuation of fixedincome securities with embedded options to the features ofstructured products—such as mortgage-backed securities andasset-backed securities—while also offering insights on basicprinciples like the time value of money. Updated to reflect currentmarket trends, Introduction to Fixed Income Analytics, SecondEdition will help practicing investment professionals investwisely in this new era, as well as assist those aspiring to enterthe field. Along the way, this practical guide:

  • Outlines approaches to bond valuation based on the discountedcash flow framework as well as relative value analysis
  • Ties in analytical concepts with what is available on theBloomberg Terminal and walks you through relevant Bloombergfunctions
  • Explains a superior metric for quantifying a portfolio’srisk exposure: conditional value-at-risk (VaR)
  • Describes the various issues associated with interest rateswaps—from counterparties and risk-return profile to economicinterpretation—and illustrates how to value them

Each chapter includes end-of-chapter questions so readers cantest their knowledge of the concepts discussed as well as refineany computational skills needed to succeed.

Understanding fixed income analytics is essential intoday’s dynamic financial environment. The SecondEdition of Introduction to Fixed Income Analytics willhelp you build a solid foundation in this field.

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Product Details

  • ISBN-13: 9780470572139
  • Publisher: Wiley
  • Publication date: 10/12/2010
  • Series: Wiley Desktop Editions Series, #191
  • Edition number: 2
  • Pages: 496
  • Sales rank: 883,098
  • Product dimensions: 6.30 (w) x 9.10 (h) x 1.70 (d)

Meet the Author

FRANK J. FABOZZI, PhD, CFA, CPA, is Professor in thePractice of Finance and Becton Fellow at the Yale School ofManagement and Editor of the Journal of PortfolioManagement. He is an Affiliated Professor at the University ofKarlsruhe’s Institute of Statistics, Econometrics, andMathematical Finance and on the Advisory Council for the Departmentof Operations Research and Financial Engineering at PrincetonUniversity.

STEVEN V. MANN, PhD, is Professor of Finance at the MooreSchool of Business, University of South Carolina. He has publishedover seventy articles in finance journals and many books on fixedincome and derivatives topics, including The Global MoneyMarkets, Measuring and Controlling Interest Rate and Credit Risk,Securities Finance (as a coeditor), and The Handbook ofFixed Income Securities (as an assistant editor). Mann is anactive consultant to clients that include some of the largestinvestment/commercial banks in the world as well as a number ofFortune 500 companies.

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Table of Contents


About the Authors

Chapter 1 Time Value of Money 1

Future Value of a Single Cash Flow 1

Present Value of a Single Cash Flow 4

Compounding/Discounting When Interest is Paid More Than Annually 8

Future and Present Values of an Ordinary Annuity 10

Yield (Internal Rate of Return) 20

Concepts Presented in this Chapter 26

Appendix: Compounding and Discounting in Continuous Time 27

Questions 31

Chapter 2 Yield Curve Analysis: Spot Rates and Forward Rates 33

A Bond is a Package of Zero-Coupon Instruments 33

Theoretical Spot Rates 34

Forward Rates 44

Dynamics of the Yield Curve 57

Concepts Presented in this Chapter 60

Questions 60

Chapter 3 Day Count Conventions and Accrued Interest 68

Day Count Conventions 63

Computing the Accrued Interest 74

Concepts Presented in this Chapter 76

Questions 76

Chapter 4 Valuation of Option-Free Bonds 77

General Principles of Valuation 77

Determining a Bond's Value 80

The Price/Discount Rate Relationship 84

Time Path of Bond 86

Valuing a Zero-Coupon Bond 90

Valuing a Bond Between Coupon Payments 90

Traditional Approach to Valuation 94

The Arbitrage-Free Valuation Approach 96

Concepts Presented in this Chapter 107

Questions 108

Chapter 5 Yield Measures 109

Sources of Return 109

Traditional Yield Measures 113

Yield to Call 121

Yield to Put 123

Yield to Worst 123

Cash Flow Yield 124

Portfolio Yield Measures 125

Yield Measures for U.S. Treasury Bills 128

Yield Spread Measures Relative to a Spot Rate Curve 134

Concepts Presented in this Chapter 137

Appendix: Mathematics of the Internal Rate of Return 138

Questions 139

Chapter 6 Analysis of Floating Rate Securities 141

General Features of Floaters 141

Valuing a Risky Floater 150

Valuation of Floaters with Embedded Options 157

Margin Measures 157

Concepts Presented in this Chapter 166

Questions 167

Chapter 7 Valuation of Bonds with Embedded Options 169

Overview of the Valuation of Bonds with Embedded Options 169

Option-Adjusted Spread and Option Cost 170

Lattice Model 172

Binomial Model 175

Illustration 196

Concepts Presented in this Chapter 198

Questions 198

Chapter 8 Cash Flow for Mortgage-Backed Securities and Amortizing Asset-Backed Securities 198

Cash Flow of Mortgage-Backed Securities 199

Amortizing Asset-Backed Securities 238

Concepts Presented in this Chapter 242

Questions 244

Chapter 9 Valuation of Mortgage-Backed and Asset-Backed Securities 247

Static Cash Flow Yield Analysis 247

Monte Carlo Simulation/OAS 249

Concepts Presented in this Chapter 270

Questions 270

Chapter 10 Analysis of Convertible Bonds 273

General Characteristics of Convertible Bonds 273

Tools for Analyzing Convertibles 276

Call and Put Features 278

Convertible Bond Arbitrage 279

Other Types of Convertibles 283

Concepts Presented in this Chapter 285

Questions 285

Chapter 11 Total Return 287

Computing the Total Return 287

OAS-Total Return 290

Total Return to Maturity 291

Total Return for a Mortgage-Backed Security 299

Portfolio Total Return 301

Total Return Analysis for Multiple Scenarios 301

Concepts Presented in this Chapter 314

Questions 314

Chapter 12 Measuring Interest Rate Risk 317

The Full Valuation Approach 317

Price Volatility Characteristics of Bonds 324

Duration 334

Other Duration Measures 350

Convexity 360

Price Value of a Basis Point 365

The Importance of Yield Volatility 367

Concepts Presented in this Chapter 369

Questions 370

Chapter 13 Value-at-Risk Measure and Extensions 373

Value-at-Risk 373

Conditional Value-at-Risk 384

Concepts Presented in this Chapter 385

Questions 386

Chapter 14 Analysis of Inflation-Protected Bonds 387

Breakeven Inflation rate 388

Valuation of TIPS 389

Measuring Interest Rate Risk 394

Concepts Presented in this Chapter 397

Questions 397

Chapter 15 The Tools of Relative Value Analysis 398

How Portfolio Managers Add Value 399

Yield Spreads over Swap and Treasury Curves 400

Asset Swaps 403

Credit Default Swaps 410

Concepts Presented in this Chapter 413

Questions 414

Chapter 16 Analysis of Interest Rate Swaps 417

Description of an Interest Rate Swap 417

Interpreting a Swap Position 419

Terminology, Conventions, and Market Quotes 420

Valuing Interest Rate Swaps 424

Primary Determinants of Swap Spreads 440

Dollar Duration of a Swap 445

Concepts Presented in this Chapter 447

Questions 447

Chapter 17 Estimating Yield Volatility 451

Historical Volatility 451

Implied Volatility 455

Forecasting Yield Volatility 459

Concepts Presented in this Chapter 463

Questions 463

Index 465

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