The Second Edition of the Fixed-Income Securities and Derivatives Handbook offers a completely updated and revised look at an important area of today's financial world. In addition to providing an accessible description of the main elements of the debt market, concentrating on the instruments used and their applications, this edition takes into account the effect of the recent financial crisis on fixed income securities and derivatives.
As timely as it is timeless, the Second Edition of the Fixed-Income Securities and Derivatives Handbook includes a wealth of new material on such topics as covered and convertible bonds, swaps, synthetic securitization, and bond portfolio management, as well as discussions regarding new regulatory twists and the evolving derivatives market.
- Offers a more detailed look at the basic principles of securitization and an updated chapter on collateralized debt obligations
- Covers bond mathematics, pricing and yield analytics, and term structure models
- Includes a new chapter on credit analysis and the different metrics used to measure bond-relative value
- Contains illustrative case studies and real-world examples of the topics touched upon throughout the book
Written in a straightforward and accessible style, Moorad Choudhry's new book offers the ideal mix of practical tips and academic theory within this important field.
About the Author
Moorad Choudhry (Surrey, UK) is head of treasury at Europe Arab Bank plc in London. Previously, he was head of treasury at KBC Financial Products, and a vice president in Structured Finance Service at JPMorgan Chase Bank. Prior to that, he was a sterling proprietary trader at Hambros Bank Limited and gilt-edged market maker and money markets trader at ABN Amro Hoare Govett Ltd. Choudhry is visiting professor at the Department of Economics, London Metropolitan University and a visiting research fellow at the ICMA Centre, University of Reading. He was educated at the University of Westminster and the University of Reading. He obtained his MBA from Henley Management School and his PhD from Birkbeck, University of London. He has written several books on the credit markets.
Table of ContentsForeword.
PART ONE: INTRODUCTION TO BONDS.
1 The Bond Instrument.
The Time Value of Money.
Bond Pricing and Yield: The Traditional Approach.
2 Bond Instruments and Interest Rate Risk.
Duration, Modifi ed Duration, and Convexity.
3 Bond Pricing and Spot and Forward Rates.
Bond Price in Continuous Time.
Term Structure Hypotheses.
4 Interest Rate Modeling.
One-Factor Term-Structure Models.
Further One-Factor Term-Structure Models.
Two-Factor Interest Rate Models.
Choosing a Term-Structure Model.
5 Fitting the Yield Curve.
Fitting the Term Structure of Interest Rates: The Practical Implementation of Cubic Spline Methodology.
Cubic Spline Methodology.
A Look at Forward Rates.
PART TWO: SELECTED CASH AND DERIVATIVE INSTRUMENTS.
6 Forwards and Futures Valuation.
Forwards and Futures.
The Basis and Implied Repo Rate.
Interest Rate Swaps.
Generic Swap Valuation.
Non–Plain Vanilla Interest Rate Swaps.
Interest Rate Swap Applications.
Option Pricing: Setting the Scene.
The Black-Scholes Option Model.
Other Option Models.
9 Measuring Option Risk.
Option Price Behavior.
The Option Smile.
Caps and Floors.
10 Credit Derivatives.
Credit Risk and Credit Derivatives.
Credit Derivative Instruments.
Credit Derivatives and Relative Value Trading.
11 The Analysis of Bonds with Embedded Options.
12 Option-Adjusted Spread Analysis.
13 Convertible Bonds.
Advantages of Issuing and Holding Convertibles.
Convertible Bond Valuation.
14 Inflation-Indexed Bonds.
Index-Linked Bond Cash Flows and Yields.
Analysis of Real Interest Rates.
15 Securitization and Asset-Backed Securities.
The Concept of Securitization.
The Process of Securitization.
Cash Flow Patterns.
ABS Structures: A Primer on Performance Metrics and Test Measures.
Securitization: Features of the 2007–2009 Financial Crisis.
16 Collateralized Debt Obligations.
Motivation Behind CDO Issuance.
Analysis and Evaluation.
CDO Market Overview Since 2005.
PART THREE: SELECTED MARKET TRADING CONSIDERATIONS.
17 The Yield Curve, Bond Yield, and Spot Rates.
Practical Uses of Redemption Yield and Duration.
Illustrating Bond Yield Using a Microsoft Excel Spreadsheet.
Implied Spot Rates and Market Zero-Coupon Yields.
Implied Spot Yields and Zero-Coupon Bond Yields.
Determining Strip Values.
Strips Market Anomalies.
Strips Trading Strategy.
Case Study: Treasury Strip Yields and Cash Flow Analysis.
18 Approaches to Trading.
Yield Curves and Relative Value.
Characterizing the Complete Term Structure.
Hedging Bond Positions.
Summary of the Derivation of the Optimum-Hedge Equation.
19 Credit Analysis and Relative Value Measurement.
The Art of Credit Analysis.
Bond Spreads and Relative Value.
Appendix I: The Black-Scholes Model in Microsoft Excel.
Appendix II: Iterative Formula Spreadsheet.
Appendix III: Pricing Spreadsheet.
About the Author.
What People are Saying About This
"Fixed-Income Securities and Derivatives Handbook is an accessible and well-written book that will appeal to both practitioners and academics with an interest in this subject."
- Richard Pereira
Structurer, Asset Finance Group, Nomura International PLC
"Once again the prolific Moorad Choudhry has triumphed in producing a comprehensive and lucid guide to an area of the financial marketsthis time fixed income and derivatives. I believe his books will come to be seen as the definitive guides to the money and capital markets. Choudhry is a true master of his subject in that he understands its complexities, and because his books are highly readable, he is able to reach out and educate a wider audience."
- David Wileman
CEO, King & Shaxson Limited
"Choudhry has written a comprehensive book on fixed-income markets that will appeal to both seasoned practitioners and novices. He has skillfully combined intuitive rationale with mathematical thoroughness to provide a clear exposition of cutting-edge techniques used in the marketplace. It will give readers a clear and deep understanding of the market in a way that is bound to make it required reading for all serious practitioners."
- Dr. Haris Kessaris
Equity Derivatives, KBC Financial Products, London
"A broad yet comprehensive outline of the fixed-income market and its derivatives. This book is useful for the starter in the markets as well as the experienced professional and academic researcher."
- Aaron Nematnejad
Japanese Equity and Convertible Bond Sales Department, Daiwa Securities
"Any reader who is looking to learn more about fixed incomeand ensure the knowledge that he gains is applicable to today's financial marketsshould pick up a copy of this book. It is a valuable read for any scholar or practitioner."
- Rod Pienaar
Director, Global Investment Bank
"Once again a superlative work from Dr. Moorad Choudhry, this time focusing on U.S. instruments and applications. A must-buy for anyone with an interest in fixed-income securities and derivatives."
- Ketul Tanna
Market Risk Management Group, JPMorgan Chase, London
"Choudhry's book provides clear and comprehensive coverage of a wide range of concepts and calculations crucial to a practitioner’s understanding of modern fixed-income security markets. Fixed-Income Securities and Derivatives Handbook takes the reader from the basic bond instruments through yield-curve modeling and options and into relatively new fields of credit derivatives and inflation-linked bonds. The examples help to clarify difficult ideas and to demystify some of the complex algebra associated with this area. The book will appeal to many levels of readers, both in the university sector and in financial markets."
- Brian A. Eales
Principal Lecturer in Financial Instruments, London Metropolitan University