Introduction to Fixed Income Analytics, 2e – Relative Value Analysis, Risk Measures, and Valuation

<p>Preface xiii<br /><br />About the Authors xv<br /><br />Chapter 1 Time Value of Money 1<br /><br />Future Value of a Single Cash Flow 1<br /><br />Present Value of a Single Cash Flow 4<br /><br />Compounding/Discounting When Interest Is Paid More Than Annually 8<br /><br />Future and Present Values of an Ordinary Annuity 10<br /><br />Yield (Internal Rate of Return) 20<br /><br />Concepts Presented in this Chapter 26<br /><br />Appendix: Compounding and Discounting in Continuous Time 27<br /><br />Questions 31<br /><br />Chapter 2 Yield Curve Analysis: Spot Rates and Forward Rates 33<br /><br />A Bond Is a Package of Zero–Coupon Instruments 33<br /><br />Theoretical Spot Rates 34<br /><br />Forward Rates 44<br /><br />Dynamics of the Yield Curve 57<br /><br />Concepts Presented in this Chapter 60<br /><br />Questions 60<br /><br />Chapter 3 Day Count Conventions and Accrued Interest 63<br /><br />Day Count Conventions 63<br /><br />Computing the Accrued Interest 74<br /><br />Concepts Presented in this Chapter 76<br /><br />Questions 76<br /><br />Chapter 4 Valuation of Option–Free Bonds 77<br /><br />General Principles of Valuation 77<br /><br />Determining a Bond s Value 80<br /><br />The Price/Discount Rate Relationship 84<br /><br />Time Path of Bond 86<br /><br />Valuing a Zero–Coupon Bond 90<br /><br />Valuing a Bond Between Coupon Payments 90<br /><br />Traditional Approach to Valuation 94<br /><br />The Arbitrage–Free Valuation Approach 96<br /><br />Concepts Presented in this Chapter 107<br /><br />Questions 108<br /><br />Chapter 5 Yield Measures 109<br /><br />Sources of Return 109<br /><br />Traditional Yield Measures 113<br /><br />Yield to Call 121<br /><br />Yield to Put 123<br /><br />Yield to Worst 123<br /><br />Cash Flow Yield 124<br /><br />Portfolio Yield Measures 125<br /><br />Yield Measures for U.S. Treasury Bills 128<br /><br />Yield Spread Measures Relative to a Spot Rate Curve 134<br /><br />Concepts Presented in this Chapter 137<br /><br />Appendix: Mathematics of the Internal Rate of Return 138<br /><br />Questions 139<br /><br />Chapter 6 Analysis of Floating Rate Securities 141<br /><br />General Features of Floaters 141<br /><br />Valuing a Risky Floater 150<br /><br />Valuation of Floaters with Embedded Options 157<br /><br />Margin Measures 157<br /><br />Concepts Presented in this Chapter 166<br /><br />Questions 167<br /><br />Chapter 7 Valuation of Bonds with Embedded Options 169<br /><br />Overview of the Valuation of Bonds with Embedded Options 169<br /><br />Option–Adjusted Spread and Option Cost 170<br /><br />Lattice Model 172<br /><br />Binomial Model 175<br /><br />Illustration 196<br /><br />Concepts Presented in this Chapter 198<br /><br />Questions 198<br /><br />Chapter 8 Cash Flow for Mortgage–Backed Securities and Amortizing Asset–Backed Securities 199<br /><br />Cash Flow of Mortgage–Backed Securities 199<br /><br />Amortizing Asset–Backed Securities 238<br /><br />Concepts Presented in this Chapter 242<br /><br />Questions 244<br /><br />Chapter 9 Valuation of Mortgage–Backed and Asset–Backed Securities 247<br /><br />Static Cash Flow Yield Analysis 247<br /><br />Monte Carlo Simulation/OAS 249<br /><br />Concepts Presented in this Chapter 270<br /><br />Questions 270<br /><br />Chapter 10 Analysis of Convertible Bonds 273<br /><br />General Characteristics of Convertible Bonds 273<br /><br />Tools for Analyzing Convertibles 276<br /><br />Call and Put Features 278<br /><br />Convertible Bond Arbitrage 279<br /><br />Other Types of Convertibles 283<br /><br />Concepts Presented in this Chapter 285<br /><br />Questions 285<br /><br />Chapter 11 Total Return 287<br /><br />Computing the Total Return 287<br /><br />OAS–Total Return 290<br /><br />Total Return to Maturity 291<br /><br />Total Return for a Mortgage–Backed Security 299<br /><br />Portfolio Total Return 301<br /><br />Total Return Analysis for Multiple Scenarios 301<br /><br />Concepts Presented in this Chapter 314<br /><br />Questions 314<br /><br />Chapter 12 Measuring Interest Rate Risk 317<br /><br />The Full Valuation Approach 317<br /><br />Price Volatility Characteristics of Bonds 324<br /><br />Duration 334<br /><br />Other Duration Measures 350<br /><br />Convexity 360<br /><br />Price Value of a Basis Point 365<br /><br />The Importance of Yield Volatility 367<br /><br />Concepts Presented in this Chapter 369<br /><br />Questions 370<br /><br />Chapter 13 Value–at–Risk Measure and Extensions 373<br /><br />Value–at–Risk 373<br /><br />Conditional Value–at–Risk 384<br /><br />Concepts Presented in this Chapter 385<br /><br />Questions 386<br /><br />Chapter 14 Analysis of Inflation–Protected Bonds 387<br /><br />Breakeven Inflation rate 388<br /><br />Valuation of TIPS 389<br /><br />Measuring Interest Rate Risk 394<br /><br />Concepts Presented in this Chapter 397<br /><br />Questions 397<br /><br />Chapter 15 The Tools of Relative Value Analysis 399<br /><br />How Portfolio Managers Add Value 399<br /><br />Yield Spreads over Swap and Treasury Curves 400<br /><br />Asset Swaps 403<br /><br />Credit Default Swaps 410<br /><br />Concepts Presented in this Chapter 413<br /><br />Questions 414<br /><br />Chapter 16 Analysis of Interest Rate Swaps 417<br /><br />Description of an Interest Rate Swap 417<br /><br />Interpreting a Swap Position 419<br /><br />Terminology, Conventions, and Market Quotes 421<br /><br />Valuing Interest Rate Swaps 424<br /><br />Primary Determinants of Swap Spreads 440<br /><br />Dollar Duration of a Swap 445<br /><br />Concepts Presented in this Chapter 447<br /><br />Questions 447<br /><br />Chapter 17 Estimating Yield Volatility 451<br /><br />Historical Volatility 451<br /><br />Implied Volatility 455<br /><br />Forecasting Yield Volatility 459<br /><br />Concepts Presented in this Chapter 463<br /><br />Questions 463<br /><br />Index 465</p>