Fixed Income Securities And Derivatives Handbook Analysis And Valuation Pdf
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- Fixed Income Securities and Derivatives
- Fixed Income Securities and Derivatives Handbook: Analysis and Valuation
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Protected under the Berne Convention. Printed in the United States of America. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. Box , Princeton, NJ U. It is sold with the understanding that the authors, publisher, and Bloomberg L.
The reader should seek the services of a qualified professional for such advice; the author, publisher, and Bloomberg L. Includes bibliographical references and index. ISBN alk. Fixed-income securities. Derivative securities. C45 Given the volume of accessible material about the market, it takes something special for a single book to find a permanent home at the desk and become a first point of reference for both practitioners and students alike.
This book reflects the emerging role of securitization within the bond markets. The low interest rate environment of the past few years and increasing number of downgrades in the corporate bond market has made the rating-resilient securitization issuance an attractive source of investment for investors. Virtually everyone who buys fixed-income products is looking at CDOs. There is clear evidence of a growing comfort with structured products from an increasing number of asset managers and investors.
Spread tightening in the cash bond market has helped draw these parties toward CDOs, but even existing participants are looking for higher yields than those offered by traditional structures. Further, margins on synthetic CDOs are dependent on the underlying portfolio spread, and so have been fueling demand for the associated credit default swaps. The result is significant product development, of the kind described in this fine book.
Fixed-Income Securities and Derivatives Handbook provides a concise and accessible description of the main elements of the markets, concentrating on the instruments used and their applications.
As it has been designed to be both succinct and concise, the major issues are introduced and described, and where appropriate certain applications are also analyzed. This includes modified duration and convexity. Chapters also cover the concept of spot zero-coupon and forward rates, and the rates implied by market bond prices and yields; yield-curve fitting techniques; an account of spline fitting using regression techniques; and an introductory discussion of term structure models.
There is also a discussion of mortgage-backed securities, techniques used in the analysis of U. Treasury TIPS securities, and a section on the use and applications of credit derivatives by participants in the fixedincome markets. This book is designed to be a good starting place for those with little or no previous understanding of or exposure to the bond markets; however, it also investigates the markets to sufficient depth to be of use to the more experienced practitioner.
Readers who are part of a front office, middle office, or back office banking and fund management staff involved to some extent with fixed-income securities will also find value here. Corporate xv xvi Preface and local authority treasurers, bank auditors and consultants, risk managers, and legal department staff may also find the book useful.
A very detailed treatment of specific markets, exchanges, or trading conventions is left out, as that would result in a very large book; interested readers can access the References section at the back of the book.
Where possible these references are indicated for their level of analysis and technical treatment. Comments on the text are most welcome and should be sent to the author care of Bloomberg Press.
A Word on the Mathematics Financial subjects such as the debt capital markets are essentially quantitative disciplines, and as such it is not possible to describe them, let alone analyze them, without a certain amount of numerical input. To maintain accessibility of this book, the level of mathematics used has been limited; as a result many topics could not be reviewed in full detail. There are very few derivations, for example, and fewer proofs.
Website and Further Market Research For the latest market research on fixed-income securities from Moorad Choudhry visit www. Thanks also to Suleman Baig for writing the Foreword. The analytic building blocks are generic and thus applicable to any market. The analysis is simplest when applied to plain vanilla default-free bonds; as the instruments analyzed become more complex, additional techniques and assumptions are required. Chapter 3 looks at spot and forward rates, the derivation of such rates from market yields, and the yield curve.
The treatment here has been kept as concise as possible. The References section at the end of the book directs interested readers to accessible and readable resources that provide more detail. All evening television news programs contain a slot during which the newscaster informs viewers where the main stock market indexes closed that day and where key foreign exchange rates ended up.
Financial sections of most newspapers also indicate at what yield the Treasury long bond closed. The yield level on the U. Because of the size and crucial nature of the debt markets, a large number of market participants, ranging from bond issuers to bond investors and associated intermediaries, are interested in analyzing them.
This chapter introduces the building blocks of the analysis. They are essentially loans. Unlike commercial bank loans, however, bonds are tradable in a secondary market.
That is 3 4 Introduction to Bonds no longer necessarily the case. In the past bond analysis was frequently limited to calculating gross redemption yield, or yield to maturity. Today basic bond math involves different concepts and calculations. These are described in several of the references for chapter 3, such as Ingersoll , Shiller , Neftci , Jarrow , Van Deventer , and Sundaresan This chapter reviews the basic elements. Bond pricing, together with the academic approach to it and a review of the term structure of interest rates, are discussed in depth in chapter 3.
In the analysis that follows, bonds are assumed to be default-free. This means there is no possibility that the interest payments and principal repayment will not be made. Such an assumption is entirely reasonable for government bonds such as U. Treasuries and U. It is less so when you are dealing with the debt of corporate and lowerrated sovereign borrowers.
The valuation and analysis of bonds carrying default risk, however, are based on those of default-free government securities. Essentially, the yield investors demand from borrowers whose credit standing is not risk-free is the yield on government securities plus some credit risk premium. The convention in certain markets is to quote a price per 1, nominal, but this is rare.
For example, if the price of a U. Comparable bonds have similar discount rates. The following sections explain the traditional approach to bond pricing for plain vanilla instruments, making certain assumptions to keep the analysis simple.
After that, a more formal analysis is presented. The Bond Instrument 5 Basic Features and Definitions One of the key identifying features of a bond is its issuer, the entity that is borrowing funds by issuing the bond in the market.
Issuers generally fall into one of four categories: governments and their agencies; local governments, or municipal authorities; supranational bodies, such as the World Bank; and corporations. Within the municipal and corporate markets there are a wide range of issuers that differ in their ability to make the interest payments on their debt and repay the full loan.
Another key feature of a bond is its term to maturity: the number of years over which the issuer has promised to meet the conditions of the debt obligation. The practice in the bond market is to refer to the term to maturity of a bond simply as its maturity or term. Bonds are debt capital market securities and therefore have maturities longer than one year. This differentiates them from money market securities. As a result, bonds are more complex to price than money market instruments, and their prices are more sensitive to changes in the general level of interest rates.
The principal of a bond—also referred to as its redemption value, maturity value, par value, or face value—is the amount that the issuer agrees to repay the bondholder on the maturity, or redemption, date, when the debt ceases to exist and the issuer redeems the bond. The cash amount of the coupon is the coupon rate multiplied by the principal of the bond.
All else being equal, the longer the term to maturity of a bond, the greater its price volatility. There are a large variety of bonds. The most common type is the plain vanilla, otherwise known as the straight, conventional, or bullet bond. All other types of bonds are variations on this theme. In the United States, all bonds make periodic coupon payments except for one type: the zero-coupon.
Zero-coupon bonds do not pay any coupon. Instead investors buy them at a discount to face value and redeem them at 6 Introduction to Bonds par. Interest on the bond is thus paid at maturity, realized as the difference between the principal value and the discounted purchase price. The coupon rates of these bonds are reset periodically according to a predetermined benchmark, such as 3-month or 6-month LIBOR London interbank offered rate.
It is an average of the offered rates posted by all the main commercial banks, and is reported by the British Bankers Association at For this reason, FRNs typically trade more like money market instruments than like conventional bonds. A bond issue may include a provision that gives either the bondholder or the issuer the option to take some action with respect to the other party.
The most common type of option embedded in a bond is a call feature. A put provision gives bondholders the right to sell the issue back to the issuer at par on designated dates before the maturity date.
The presence of embedded options makes the valuation of such bonds more complicated than that of plain vanilla bonds. Understanding these concepts is essential.
Fixed Income Securities and Derivatives
Explore a new genre. Burn through a whole series in a weekend. Let Grammy award-winning narrators transform your commute. Broaden your horizons with an entire library,all your own. For decades, The Handbook of Fixed Income Securities has been the most trusted resource in the world for fixed income investing. Since the publication of the last edition, however, the financial markets have experienced majorupheavals, introducing dramatic new opportunities and risks. This completely revised and expanded eighth edition contains 31 new chapters that bring you up to date on the latest products, analytical tools, methodologies, and strategies for identifying and capitalizing on the potential of thefixed income securities market in order to enhance returns.
Fixed Income Securities and Derivatives Handbook: Analysis and Valuation
The definitive guide to fixed-come securities-revised to reflect today's dynamic financial environment 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. 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.
Capital Market Instruments pp Cite as. In most countries government expenditure exceeds the level of government income received through taxation. The core of any domestic capital market is usually the government bond market, which also forms the benchmark for all other borrowing.
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