Fixed Income Analysis (Hardcover, 2nd)

Foreword xiii Acknowledgments xvii Introduction xxi Note on Rounding Differences xxvii CHAPTER 1 Features of Debt Securities 1 I. Introduction 1 II. Indenture and Covenants 2 III. Maturity 2 IV. Par Value 3 V. Coupon Rate 4 VI. Provisions for Paying Off Bonds 8 VII. Conversion Privilege 13 VIII. Put Provision 13 IX. Currency Denomination 13 X. Embedded Options 14 XI. Borrowing Funds to Purchase Bonds 15 CHAPTER 2 Risks Associated with Investing in Bonds 17 I. Introduction 17 II. Interest Rate Risk 17 III. Yield Curve Risk 23 IV. Call and Prepayment Risk 26 V. Reinvestment Risk 27 VI. Credit Risk 28 VII. Liquidity Risk 32 VIII. Exchange Rate or Currency Risk 33 IX. Inflation or Purchasing Power Risk 34 X. Volatility Risk 34 XI. Event Risk 35 XII. Sovereign Risk 36 CHAPTER 3 Overview of Bond Sectors and Instruments 37 I. Introduction 37 II. Sectors of the Bond Market 37 III. Sovereign Bonds 39 IV. Semi Government/Agency Bonds 44 V. State and Local Governments 53 VI. Corporate Debt Securities 56 VII. Asset Backed Securities 67 VIII. Collateralized Debt Obligations 69 IX. Primary Market and Secondary Market for Bonds 70 CHAPTER 4 Understanding Yield Spreads 74 I. Introduction 74 II. Interest Rate Determination 74 III. U.S. Treasury Rates 75 IV. Yields on Non Treasury Securities 82 V. Non U.S. Interest Rates 90 VI. Swap Spreads 92 CHAPTER 5 Introduction to the Valuation of Debt Securities 97 I. Introduction 97 II. General Principles of Valuation 97 III. Traditional Approach to Valuation 109 IV. The Arbitrage Free Valuation Approach 110 V. Valuation Models 117 CHAPTER 6 Yield Measures, Spot Rates, and Forward Rates 119 I. Introduction 119 II. Sources of Return 119 III. Traditional Yield Measures 120 IV. Theoretical Spot Rates 135 V. Forward Rates 147 CHAPTER 7 Introduction to the Measurement of Interest Rate Risk 157 I. Introduction 157 II. The Full Valuation Approach 157 III. Price Volatility Characteristics of Bonds 160 IV. Duration 168 V. Convexity Adjustment 180 VI. Price Value of a Basis Point 182 VII. The Importance of Yield Volatility 183 CHAPTER 8 Term Structure and Volatility of Interest Rates 185 I. Introduction 185 II. Historical Look at the Treasury Yield Curve 186 III. Treasury Returns Resulting from Yield Curve Movements 189 IV. Constructing the Theoretical Spot Rate Curve for Treasuries 190 V. The Swap Curve (LIBOR Curve) 193 VI. Expectations Theories of the Term Structure of Interest Rates 196 VII. Measuring Yield Curve Risk 204 VIII. Yield Volatility and Measurement 207 CHAPTER 9 Valuing Bonds with Embedded Options 215 I. Introduction 215 II. Elements of a Bond Valuation Model 215 III. Overview of the Bond Valuation Process 218 IV. Review of How to Value an Option Free Bond 225 V. Valuing a Bond with an Embedded Option Using the Binomial Model 226 VI. Valuing and Analyzing a Callable Bond 233 VII. Valuing a Putable Bond 240 VIII. Valuing a Step Up Callable Note 243 IX. Valuing a Capped Floater 244 X. Analysis of Convertible Bonds 247 CHAPTER 10 Mortgage Backed Sector of the Bond Market 256 I. Introduction 256 II. Residential Mortgage Loans 257 III. Mortgage Passthrough Securities 260 IV. Collateralized Mortgage Obligations 273 V. Stripped Mortgage Backed Securities 294 VI. Nonagency Residential Mortgage Backed Securities 296 VII. Commercial Mortgage Backed Securities 298 CHAPTER 11 Asset Backed Sector of the BondMarket 302 I. Introduction 302 II. The Securitization Process and Features of ABS 303 III. Home Equity Loans 313 IV. Manufactured Housing Backed Securities 317 V. Residential MBS Outside the United States 318 VI. Auto Loan Backed Securities 320 VII. Student Loan Backed Securities 322 VIII. SBA Loan Backed Securities 324 IX. Credit Card Receivable Backed Securities 325 X. Collateralized Debt Obligations 327 CHAPTER 12 ValuingMortgage Backed and Asset Backed Securities 335 I. Introduction 335 II. Cash Flow Yield Analysis