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The Handbook of fixed income securities

Author: Fabozzi, Frank ; Mann, Steven V.Publisher: McGraw-Hill, 2005.Edition: 7th ed.Language: EnglishDescription: 1495 p. : Graphs ; 24 cm.ISBN: 0071440992Type of document: BookBibliography/Index: Includes bibliographical references and index
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Book Europe Campus
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Print HG4651 .H265 2005
(Browse shelf)
001208655
Available 001208655
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Includes bibliographical references and index

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The Handbook of Fixed Income Securities Contents Preface xxiii Acknowledgments xxv Contributors xxvii PART ONE BACKGROUND Chapter 1 Overview of the Types and Features of Fixed Income Securities 3 Frank J. Fabozzi, Michael G. Ferri, and Steven V. Mann Bonds 3 Preferred Stock 15 Residential Mortgage-Backed Securities 16 Commercial Mortgage-Backed Securities 19 Asset-Backed Securities 19 Summary 20 Chapter 2 Risks Associated with Investing in Fixed Income Securities 21 Ravi F Dattatreya and Frank J. Fabozzi Market, or Interest-Rate, Risk 22 Reinvestment Risk 22 Timing, or Call, Risk 23 Credit Risk 24 Yield-Curve, or Maturity, Risk 25 Inflation, or Purchasing Power, Risk 26 Liquidity Risk 26 Exchange-Rate, or Currency, Risk 27 Volatility Risk 28 vi Contents Political or Legal Risk Event Risk 29 Sector Risk 29 Other Risks 29 Summary 29 Chapter 3 28 The Primary and Secondary Bond Markets 31 Frank J. Fabozzi and Frank J. Jones Primary Market 31 Secondary Markets 39 Summary 51 Chapter 4 Bond Market Indexes 53 Frank K. Reilly and David J. Wright Uses of Bond Indexes 53 Building and Maintaining a Bond Index 55 Description of Alternative Bond Indexes 56 Risk/Return Characteristics 61 Correlation Relationships 65 Summary 70 PART TWO BASIC ANALYTICS Chapter 5 Bond Pricing, Yield Measures, and Total Return 73 Frank J. Fabozzi Bond Pricing 73 Conventional Yield Measures 86 Total Return Analysis 97 Summary 105 Chapter 6 Calculating Investment Returns 107 Bruce I Feibel Single-Period Rate of Return 108 Performance of an Investment: Money-Weighted Returns 119 Contents vii Performance of the Investment Manager: Time-Weighted Returns 125 Multiple-Period Return Calculation 129 Summary 133 Chapter 7 The Structure of Interest Rates 135 Frank J. Fabozzi The Base Interest Rate Risk Premium 135 135 The Term Structure of Interest Rates 139 Summary 156 Chapter 8 Overview of Forward Rate Analysis 159 Antti Ilmanen Computation of Par, Spot, and Forward Rates 160 Main Influences on the Yield-Curve Shape 163 Using Forward Rate Analysis in Yield-Curve Trades 171 Chapter 9 Measuring Interest-Rate Risk 183 Frank J. Fabozzi, Gerald W. Buetow, Jr., and Robert R. Johnson The Full-Valuation Approach 184 Price Volatility Characteristics of Bonds 188 Duration 197 Modified Duration versus Effective Duration 203 Convexity 210 Price Value of a Basis Point 222 The Importance of Yield Volatility 225 PART THREE SECURITIES Chapter 10 U.S. Treasury and Agency Securities 229 Frank J. Fabozzi and Michael J. Fleming Treasury Securities 229 Agency Securities 242 Summary 250 viii Contents Chapter 11 Municipal Bonds 251 Sylvan G. Feldstein, Frank J. Fabozzi, Alexander M. Grant, Jr., and Patrick M. Kennedy Features of Municipal Securities 253 Types of Municipal Obligations 255 The Commercial Credit Rating of Municipal Bonds 264 Municipal Bond Insurance 270 Valuation Methods 271 Tax Provisions Affecting Municipals 272 Yield Relationships within the Municipal Bond Market 276 Primary and Secondary Markets 278 Bond Indexes 279 Official Statement 280 Regulation of the Municipal Securities Market 280 Chapter 12 Private Money Market Instruments 285 Frank J. Fabozzi, Steven V. Mann, and Richard S. Wilson Commercial Paper 285 Bankers Acceptances 289 Large-Denomination Negotiable CDs 292 Repurchase Agreements 295 Federal Funds 301 Summary 303 Chapter 13 Corporate Bonds 305 Frank J. Fabozzi, Steven V Mann, and Richard S. Wilson The Corporate Trustee 306 Some Bond Fundamentals 307 Security for Bonds 312 Alternative Mechanisms to Retire Debt before Maturity 320 Credit Risk 327 Event Risk 330 High-Yield Bonds 331 Default Rates and Recovery Rates 335 Contents ix Chapter 14 Medium-Term Notes 339 Leland E. Crabbe Background of the MTN Market 340 Mechanics of the Market 342 The Economics of MTNs and Corporate Bonds 344 Structured MTNs 347 Euro-MTNs 349 Chapter 15 Inflation-Linked Bonds 351 John B. Brynjolfsson Mechanics and Measurement 353 Marketplace 361 Valuation and Performance Dynamics 364 Investors 364 Issuers 369 Other Issues 371 Conclusion 372 Chapter 16 Floating-Rate Securities 373 Frank J. Fabozzi and Steven V Mann General Features of Floaters and Major Product Types 374 Call and Put Provisions 376 Spread Measures 377 Price Volatility Characteristics of Floaters 379 Portfolio Strategies 382 Chapter 17 Nonconvertible Preferred Stock 385 Frank J. Fabozzi and Steven V. Mann Preferred Stock Issuance 386 Preferred Stock Ratings 390 Tax Treatment of Dividends 392 x Contents Chapter 18 International Bond Markets and Instruments 393 Christopher B. Steward The Instruments: Euro, Foreign, and Global 394 U. S.-Pay International Bonds 395 Foreign-Pay International Bonds 402 Conclusion 408 Chapter 19 The Eurobond Market 409 David Munves Founding and the Early Years 410 The Eurobond Market Post-EMU: The Drivers of Development 415 The Corporate Eurobond Market Today 426 Beyond High-Grade Euro Corporates: The Other Eurobond Sectors 434 The Outlook for the Eurobond Market 439 Chapter 20 Emerging Markets Debt 441 Jane Sachar Brauer The Debt Universe 441 Emerging Markets Debt Performance History 445 Brady Bonds 449 Defaults, Exchanges, Restructurings, Workouts, and Litigation 454 Derivatives 464 Credit-Linked Notes (CLNs) 466 Valuation Methods 467 Conclusion 469 Collateralized Brady Bonds 469 Noncollateralized Brady Bonds 470 Chapter 21 Stable Value Investments 471 John R. Caswell and Karl Tourville Stable Value Products 472 The Evolution of Stable Value 477 Stable Value Portfolio Management 480 The Future of Stable Value 485 Contents xi Chapter 22 An Overview of Mortgages and the Mortgage Market 487 Anand K. Bhattacharya and William S. Berliner Product Definition and Terms 487 Mechanics of Mortgage Loans 493 The Mortgage Industry 497 Generation of Mortgage Lending Rates 501 Component Risks of Mortgage Products 507 Conclusion 512 Chapter 23 Agency Mortgage-Backed Securities 513 Andrew Davidson and Anne Ching Mortgage Loans 513 History of the Secondary Mortgage Market 517 Agency Pool Programs 518 Trading Characteristics 522 Prepayment and Cash-Flow Behavior 526 Prepayment Conventions 527 Sources of Prepayments 527 Prepayment Models 533 Valuation 535 Summary 539 Chapter 24 Collateralized Mortgage Obligations 541 Alexander Crawford The CMO Market 541 CMO Tranche Types 543 Agency versus Nonagency CMOs 562 CMO Analysis 568 Pulling Up a CMO 577 Alphabetical List of Some Useful Bloomberg Commands for CMOs 577 Chapter 25 Nonagency CMOs 579 Frank J. Fabozzi, Anthony B. Sanders, David Yuen, and Chuck Ramsey The Nonagency MBS Market 579 Credit Enhancements 581 xii Contents Compensating Interest 586 Weighted-Average Coupon Dispersion 586 Cleanup Call Provisions 588 Chapter 26 Residential Asset-Backed Securities 589 John McElravey Market Development 590 Characteristics of Subprime Borrowers 592 Prepayment Speeds 595 Relative-Value Consequences 598 Key Aspects of Credit Analysis 600 Structural Considerations 604 Conclusion 613 Chapter 27 Commercial Mortgage-Backed Securities 615 Anthony B. Sanders The CMBS Deal 615 The Underlying Loan Portfolio 621 The Role of the Servicer 625 Loan Origination, the Lemons Market, and the Pricing of CMBS 627 Summary 628 Chapter 28 Credit Card Asset-Backed Securities 629 John McElravey Securitization of Credit Card Receivables 629 The Credit Card ABS Market 642 Conclusion 645 Chapter 29 Securities Backed by Automobile Loans and Leases 647 W. Alexander Roever U.S. Auto Finance Industry 647 Understanding Loan Collateral Performance 652 Auto Loan ABS Structures 656 Auto Lease Origination 659 Auto Lease Securitization 662 Contents xiii Relative Value Analysis of Auto Loan and Lease ABS 666 Conclusion 668 Chapter 30 Cash-Collateralized Debt Obligations 669 Laurie S. Goodman, Frank J. Fabozzi, and Douglas J. Lucas Family of CDOs 670 Cash CDOs 670 Cash-Flow Transactions 674 Market-Value Transactions 678 Synthetic CDOs 683 Secondary Market Trading Opportunities 684 Investment Principles for Managing a Portfolio of CDOs 689 Chapter 31 Synthetic CDOs 695 Jeffrey T Prince, Arturo Cifuentes, and Nichol Bakalar Growth and Evolution of the SCDO Market 696 Synthetic CDOs from the Ground Up 698 A Comparison with Cash CDOs 705 Single-Tranche (Bespoke) Transactions 719 Investor's Guide to Synthetic CDOs 725 Conclusion 728 PART FOUR CREDIT ANALYSIS AND CREDIT RISK MODELING Chapter 32 Credit Analysis for Corporate Bonds 733 Frank J. Fabozzi Approaches to Credit Analysis 733 Industry Considerations 735 Financial Analysis 740 Indenture Provisions 750 Utilities 756 Finance Companies 763 The Analysis of High-Yield Corporate Bonds 768 Credit Scoring Models 775 Conclusion 777 xiv Contents Chapter 33 Credit Risk Modeling 779 Tim Backshall, Kay Giesecke, and Lisa Goldberg Structural Credit Models 780 Reduced-Form Credit Models 790 Incomplete-Information Credit Models 794 Chapter 34 Guidelines in the Credit Analysis of Municipal General Obligation and Revenue Bonds 799 Sylvan G. Feldstein and Alexander M. Grant, Jr. The Legal Opinion 800 The Need to Know Who Really Is the Issuer 805 On the Financial Advisor and Underwriter 806 General Credit Indicators and Economic Factors in the Credit Analysis 807 Red Flags for the Investor 824 Chapter 35 Rating Agency Approach to Structured Finance 827 Hedi Katz Credit Committee Process 827 Collateral Analysis 828 Financial Review of Structure 830 Legal Review of Structure 831 Parties Review 833 PART FIVE VALUATION AND ANALYSIS Chapter 36 Fixed Income Risk Modeling 839 Ronald N. Kahn The Valuation Model 840 The Risk Model 844 Performance 847 Portfolio Risk Characterization 849 Summary 850 Contents xv Chapter 37 Valuation of Bonds with Embedded Options 851 Frank J. Fabozzi, Andrew Kalotav, and Michael Dorigan The Interest-Rate Lattice 852 Calibrating the Lattice 856 Using the Lattice for Valuation 860 Fixed-Coupon Bonds with Embedded Options 860 Valuation of Two More Exotic Structures 865 Extensions 867 Conclusion 872 Chapter 38 Valuation of Mortgage-Backed Securities 873 Frank J. Fabozzi, Scott F. Richard, and David S. Horowitz Static Valuation 874 Dynamic Valuation Modeling 875 Illustrations Summary 895 Chapter 39 OAS and Effective Duration 897 David Audley, Richard Chin, and Shrikant Ramamurthy 883 The Price/Yield Relationship for Option-Embedded Bonds 898 Effective Duration 902 Effective Maturity 906 Option-Adjusted Spreads 908 Summary 911 Chapter 40 A Framework for Analyzing Yield-Curve Trades 913 Antti Ilmanen Forward Rates and Their Determinants 914 Decomposing Expected Returns of Bond Positions 921 Chapter 41 The Market Yield Curve and Fitting the Term Structure of Interest Rates 939 Moorad Choudhry Basic Concepts 939 The Concept of the Forward Rate 943 xvi Contents Spot and Forward Yield Curves 947 The Term Structure 949 Fitting the Yield Curve 954 Nonparametric Methods 961 Comparing Curves 965 Chapter 42 Hedging Interest-Rate Risk with Term-Structure Factor Models 967 Lionel Martellini, Philippe Priaulet, and Frank J. Fabozzi Defining Interest-Rate Risk(s) 968 Hedging with Duration 969 Relaxing the Assumption of a Small Shift 972 Relaxing the Assumption of a Parallel Shift 974 Comparative Analysis of Various Hedging Techniques 981 Summary 985 PART SIX BOND PORTFOLIO MANAGEMENT Chapter 43 Introduction to Bond Portfolio Management 989 Kenneth E. Volpert Overview of Traditional Bond Management 989 Overview of the Core/Satellite Approach 991 Why Choose Indexing? 993 Which Index Should Be Used? 996 Primary Bond Indexing Risk Factors 999 Enhancing Bond Indexing 1006 Measuring Success 1012 Chapter 44 Quantitative Management of Benchmarked Portfolios 1017 Lev Dynkin, Jay Hyman, and Vadim Konstantinovsky Selection and Customization of Benchmarks 1018 Diversification Issues in Benchmarks 1023 Portfolio Analysis Relative to a Benchmark 1027 Quantitative Approaches to Benchmark Replication 1033 Controlling Issuer-Specific Risk in the Portfolio 1038 Contents xvii Quantitative Methods for Portfolio Optimization 1042 Tools for Quantitative Portfolio Management 1045 Conclusion 1046 Chapter 45 Financing Positions in the Bond Market 1047 Frank J. Fabozzi and Steven V Mann Repurchase Agreement 1048 Dollar Rolls 1054 1057 Margin Buying 1057 Securities Lending Chapter 46 Global Credit Bond Portfolio Management 1061 Jack Malvev Credit Relative-Value Analysis 1066 Total-Return Analysis 1069 Primary Market Analysis 1070 Liquidity and Trading Analysis 1072 Secondary Trade Rationales 1072 Spread Analysis 1078 Structural Analysis 1082 Credit-Curve Analysis 1085 Credit Analysis 1087 Asset Allocation/Sector Rotation Conclusion 1089 Chapter 47 Bond Immunization: An Asset/Liability Optimization Strategy 1091 Frank J. Fabozzi 1088 What Is an Immunized Portfolio? 1091 Maturity-Matching: The Reinvestment Problem 1092 Single-Period Immunization 1093 Rebalancing Procedures 1096 Multiperiod Immunization 1097 Applications of the Immunization Strategy Variations to Immunization 1100 Conclusion 1101 1098 xviii Contents Chapter 48 Dedicated Bond Portfolios 1103 Frank J. Fabozzi The Need for a Broader Asset/Liability Focus 1103 Cash-Flow Matching for Pension Funds 1104 Role of Money Manager and Dealer Firm 1116 Conclusion 1117 Chapter 49 International Bond Portfolio Management 1119 Christopher B. Steward, J. Hank Lynch, and Frank J. Fabozzi Investment Objectives and Policy Statements 1120 Developing a Portfolio Strategy 1126 Portfolio Construction 1134 Chapter 50 Transition Management 1147 Daniel Gallegos Overview of Fixed Income Transition Management 1147 Processes of a Transition 1150 Risk Management and Transition Management 1157 Measuring Transition Performance 1158 Points to Consider 1160 PART SEVEN DERIVATIVES AND THEIR APPLICATIONS Chapter 51 Introduction to Interest-Rate Futures and Options Contracts 1163 Frank J. Fabozzi, Steven V. Mann, and Mark Pitts Basic Characteristics of Derivative Contracts 1163 Representative Exchange-Traded Interest-Rate Futures Contracts 1166 Representative Exchange-Traded Futures Options Contracts 1175 OTC Contracts 1178 Summary 1185 Contents xix Chapter 52 Pricing Futures and Portfolio Applications 1187 Frank J. Fabozzi, Mark Pitts, and Bruce M. Collins Pricing of Futures Contracts 1188 Applications to Portfolio Management 1195 Portable Alpha 1198 Summary 1200 Chapter 53 Treasury Bond Futures Mechanics and Basis Valuation 1201 David T Kim Mechanics of the Futures Contract 1202 The Basis 1206 Carry 1207 Options 1209 Conclusion 1223 Chapter 54 The Basics of Interest-Rate Options 1225 William J. Gartland and Nicholas C. Letica How Options Work 1225 Options Strategies--Reorganizing the Profit/Loss Graph 1238 Classic Option Strategies 1239 Practical Portfolio Strategies 1242 Conclusion 1247 Chapter 55 Interest-Rate Swaps and Swaptions 1249 Frank J. Fabozzi, Steven V. Mann, and Moorad Choudhry Description of an Interest-Rate Swap 1249 Interpreting a Swap Position 1251 Terminology, Conventions, and Market Quotes 1253 Valuing Interest-Rate Swaps 1255 Primary Determinants of Swap Spreads 1272 Nongeneric Interest-Rate Swaps 1274 Canceling a Swap 1278 xx Contents Credit Risk 1278 Swaptions 1279 Chapter 56 Interest-Rate Caps and Floors and Compound Options 1283 Anand K. Bhattacharya Features of Interest-Rate Caps and Floors 1283 Pricing of Caps and Floors 1284 Interest-Rate Caps 1285 Participating Caps 1287 Interest-Rate Floors 1290 Interest-Rate Collars 1291 Interest-Rate Corridors 1293 Cap/Floor Parity 1294 Termination of Caps and Floors 1296 Compound Options 1296 Concluding Comments 1300 Chapter 57 Controlling Interest-Rate Risk with Futures and Options 1301 Frank J. Fabozzi, Shrikant Ramamurthy, and Mark Pitts Controlling Interest-Rate Risk with Futures Hedging with Options 1320 Summary 1334 Chapter 58 Introduction to Credit Derivatives 1337 Dominic O'Kane 1301 The Credit Derivatives Market 1338 The Credit Default Swap 1339 CDS Portfolio Products 1352 Basket Default Swaps 1353 Synthetic CDOs 1357 Credit Derivative Options 1364 Conclusions 1367 Contents xxi PART EIGHT CONVERTIBLE SECURITIES Chapter 59 Convertible Securities and Their Investment Characteristics 1371 Chris P. Dialynas and John C. Ritchie, Jr. General Characteristics of Convertibles 1372 Advantages and Disadvantages to Issuing Firms 1375 Advantages to the Investor 1376 Disadvantages to the Investor 1377 Alternative Forms of Convertible Financing 1378 Types of Convertible Investors 1378 Analysis of Convertible Securities 1379 An Illustrative Analysis 1379 Duration Management 1389 Valuation of Convertibles 1389 Summary 1392 Chapter 60 Convertible Securities and Their Valuation 1393 Mihir Bhattacharya Evolution in the Convertible Markets 1396 Basic Characteristics of Convertible Securities Traditional Valuation Method 1421 Convertible Valuation Models 1424 Exercising the Embedded Options 1436 Looking Forward 1440 Summary 1441 Appendix A A Review of the Time Value of Money 1443 rank J. Fabozzi 1416 Future Value 1443 Present Value 1449 1453 Yield (Internal Rate of Return) Index 1459

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