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• Front Cover
• Fixed Income Markets and Their Derivatives
• Copyright Page
• Contents
• Preface
• Acknowledgments
• PART 1 INSTITUTIONS AND CONVENTIONS
• CHAPTER 1 Overview of Fixed Income Markets
• 1.1 Overview of Debt Contracts
• 1.1.1 Cash-Flow Rights of Debt Securities
• 1.1.2 Primary and Secondary Markets
• 1.2 Players and Their Objectives
• 1.2.1 Governments
• 1.2.2 Central Banks
• 1.2.3 Federal Agencies and Government-Sponsored Enterprises (GSEs)
• 1.2.4 Corporations and Banks
• 1.2.5 Financial Institutions and Dealers
• 1.2.6 “Buy-Side” Institutions
• 1.2.7 Households
• 1.3 Classification of Debt Securities
• 1.4 Risk of Debt Securities
• 1.4.1 Interest Rate Risk
• 1.4.2 Credit Risk
• 1.4.3 Liquidity Risk
• 1.4.4 Contractual Risk
• 1.4.5 Inflation Risk
• 1.4.6 Event Risk
• 1.4.7 Tax Risk
• 1.4.8 FX Risk
• 1.5 Return-Risk History
• Suggested References and Readings
• CHAPTER 2 Price-Yield Conventions
• 2.1 Concepts of Compounding and Discounting
• 2.1.1 Future Values
• 2.1.2 Annuities
• 2.1.3 Present Values
• 2.2. Yield to Maturity or Internal Rate of Return
• 2.2.1 Semiannual Compounding
• 2.3. Prices in Practice
• 2.4. Prices and Yields of T-Bills
• 2.4.1 Yield of a T-Bill with n < 182 Days
• 2.4.2 Yield of a T-Bill with n > 182 Days
• 2.5. Prices and Yields of T-Notes and T-Bonds
• 2.6. Price-Yield Relation Is Convex
• 2.7. Conventions in Other Markets
• Suggested References and Readings
• CHAPTER 3 Federal Reserve (Central Bank) and Fixed Income Markets
• 3.1 Central Banks
• 3.2 Monetary Policies
• 3.2.1 Open Market Operations
• 3.2.2 The Discount Window
• 3.2.3 Reserve Requirements
• 3.3 Fed Funds Rates
• 3.4 Payments Systems and Conduct of Auctions
• 3.5 Fed’s Actions to Stem the Credit Crunch of 2007–2008
• Suggested Readings and References
• CHAPTER 4 Organization and Transparency of Fixed Income Markets
• 4.1 Introduction
• 4.2 Primary Markets
• 4.2.1 Treasury Markets
• 4.2.2 Corporate Debt
• 4.3 Interdealer Brokers
• 4.4 Secondary Markets
• 4.4.1 Dealer Market Transparency
• 4.4.2 Indicators of Transparency
• 4.4.3 Evidence on Trading Characteristics
• 4.4.4 Matrix Prices and Execution Costs
• 4.5 Evolution of Secondary Markets
• Suggested Readings and References
• CHAPTER 5 Financing Debt Securities: Repurchase (Repo) Agreements
• 5.1 Repo and Reverse Repo Contracts
• 5.1.1 Repo Contract Defined
• 5.1.2 Reverse Repo Contract Defined
• 5.1.3 Repo as Secured Lending
• 5.2 Real-Life Features
• 5.3 Long and Short Positions Using Repo and Reverse Repo
• 5.4 General Collateral Repo Agreement
• 5.4.1 GC Repo Contract and Market
• 5.4.2 GC Repo Rates
• 5.5 Special Collateral Repo Agreement
• 5.6 Fails in Repo Market
• 5.7 Developments in Repo Markets
• Suggested Readings and References
• CHAPTER 6 Auctions of Treasury Debt Securities
• 6.1 Benchmark Auctions Schedule
• 6.1.1 Auctions of Money Market Instruments
• 6.1.2 Auctions of Treasury Notes
• 6.1.3 Auctions of Treasury Bonds
• 6.1.4 Auctions of TIPS
• 6.2 Conduct of Treasury Auctions
• 6.2.1 Auction Announcement
• 6.2.2 When-Issued Trading and Book Building
• 6.2.3 Auction Mechanisms
• 6.2.4 Uniform Price Auctions
• 6.2.5 Discriminatory Auctions
• 6.3 Auction Theory and Empirical Evidence
• 6.3.1 Winner’s Curse and Bid Shading
• 6.4 Auction Cycles and Financing Rates
• Suggested Readings and References
• PART 2 ANALYTICS OF FIXED INCOME MARKETS
• CHAPTER 7 Bond Mathematics: DV01, Duration, and Convexity
• 7.1 DV01/PVBP or Price Risk
• 7.2 Duration
• 7.2.1 Excel Applications
• 7.2.2 Properties of Duration and PVBP
• 7.2.3 PVBP and Duration of Portfolios
• 7.3 Trading and Hedging
• 7.3.1 Spread Trades: Curve Steepening or Curve Flattening Trades
• 7.4 Convexity
• 7.4.1 Bullet versus Barbell Securities (Butterfly Trade)
• 7.5 Effective Duration and Effective Convexity
• Suggested Readings and References
• CHAPTER 8 Yield Curve and the Term Structure
• 8.1 Yield-Curve Analysis
• 8.1.1 Principal Components Analysis of Yield Curve
• 8.1.2 Volatility of Short and Long Rates
• 8.1.3 Price-Based Versus Yield-Based Volatility
• 8.1.4 Economic News Announcements and Volatility
• 8.1.5 Yield Versus Duration
• 8.1.6 Coupon and Vintage Effects
• 8.2 Term Structure
• 8.2.1 Implied Zeroes
• 8.2.2 Bootstrapping Procedure
• 8.2.3 Par Bond Yield Curve
• 8.3 Forward Rates of Interest
• 8.4 STRIPS Markets
• 8.5 Extracting Zeroes in Practice
• Suggested References and Readings
• CHAPTER 9 Models of Yield Curve and the Term Structure
• 9.1 Introduction
• 9.2 Modeling Mean-Reverting Interest Rates
• 9.2.1 The Vasicek Model
• 9.2.2 The Cox, Ingersoll, and Ross Model
• 9.3 Calibration to Market Data
• 9.3.1 The Black, Derman, and Toy Model
• 9.3.2 General Implementation of the BDT Approach
• 9.4 Interest Rate Derivatives
• 9.5 A Review of One-Factor Models
• Suggested Readings and References
• CHAPTER 10 Modeling Credit Risk and Corporate Debt Securities
• 10.1 Defaults, Business Cycles, and Recoveries
• 10.2 Rating Agencies
• 10.3 Structural Models of Default
• 10.3.1 Probability of Default and Loss Given Default
• 10.3.2 Market Prices
• 10.4 Implementing Structural Models: The KMV Approach
• 10.4.1 Subordinated Corporate Debt
• 10.4.2 Safety Covenants
• 10.5 Costs of Financial Distress and Corporate Debt Pricing
• 10.6 Reduced-Form Models
• 10.7 Credit Spreads Puzzle
• Suggested Readings and References
• PART 3 SOME FIXED INCOME MARKET SEGMENTS
• CHAPTER 11 Mortgages, Federal Agencies, and Agency Debt
• 11.1 Overview of Mortgage Contracts
• 11.1.1 Lenders’ Risks
• 11.1.1.1 Default Risk
• 11.1.1.2 Prepayments
• 11.1.1.3 Interest Rate Risk
• 11.2 Types of Mortgages
• 11.2.1 Fixed-Rate Mortgages (FRMs)
• 11.2.2 Adjustable-Rate Mortgages (ARMs)
• 11.2.3 Agency Mortgages
• 11.2.4 Jumbo Mortgages
• 11.2.5 Alt-A Mortgages
• 11.2.6 Subprime Mortgages
• 11.3 Mortgage Cash Flows and Yields
• 11.4 Federal Agencies
• 11.5 Federal Agency Debt Securities
• 11.5.1 Empirical Evidence on Spreads
• Suggested Readings and References
• CHAPTER 12 Mortgage-Backed Securities
• 12.1 Overview of Mortgage-Backed Securities
• 12.1.1 Securitization
• 12.1.2 Guarantees and Credit Enhancement
• 12.1.3 Creation of an Agency MBS
• 12.1.4 Cash Flows and Market Conventions
• 12.2 Risks: Prepayments
• 12.2.1 Measuring Prepayments
• 12.2.1.1 Twelve-Year Retirement
• 12.2.1.2 Constant Monthly Mortality
• 12.2.2 FHA Experience
• 12.2.3 PSA Experience
• 12.2.4 Mortgage Cash Flows with Prepayments
• 12.3 Factors Affecting Prepayments
• 12.3.1 Refinancing Incentive
• 12.3.2 Seasonality Factor
• 12.3.3 Age of the Mortgage
• 12.3.4 Family Circumstances
• 12.3.5 Housing Prices
• 12.3.6 Mortgage Status (Premium Burnout)
• 12.3.7 Mortgage Term
• 12.4 Valuation Framework
• 12.5 Valuation of Pass-Through MBS
• 12.5.1 Empirical Behavior of an OAS
• 12.6 REMICS
• 12.6.1 REMIC Structure
• 12.6.2 Sequential Structure
• 12.6.3 Planned Amortization Class Structure
• Suggested Readings and References
• CHAPTER 13 Inflation-Linked Debt: Treasury Inflation-Protected Securities
• 13.1 Overview of Inflation-Indexed Debt
• 13.2 Role of Indexed Debt
• 13.3 Design of TIPS
• 13.3.1 Choice of Index
• 13.3.2 Indexation Lag
• 13.3.3 Maturity Composition of TIPS
• 13.3.4 Strippability of TIPS
• 13.3.5 Tax Treatment
• 13.4 Cash-Flow Structure
• 13.4.1 Indexed Zero Coupon Structure
• 13.4.2 Principal-Indexed Structure
• 13.4.3 Interest-Indexed Structure
• 13.5 Real Yields, Nominal Yields, and Break-Even Inflation
• 13.6 Cash Flows, Prices, Yields, and Risks of TIPS
• 13.7 Investor’s Perspective
• 13.7.1 Conclusion
• Suggested Readings and References
• PART 4 FIXED INCOME DERIVATIVES
• CHAPTER 14 Derivatives on Overnight Interest Rates
• 14.1 Overview
• 14.2 Fed Funds Futures Contracts
• 14.2.1 Recovering Market Expectations of Future Actions by the FOMC
• 14.3 Overnight Index Swaps (OIS)
• 14.3.1 Contract Specifications
• 14.4 Valuation of OIS
• 14.5 OIS Spreads with Other Money Market Yields
• Suggested Readings and References
• CHAPTER 15 Eurodollar Futures Contracts
• 15.1 Eurodollar Markets and LIBOR
• 15.1.1 LIBOR Fixing
• 15.1.2 Calculating Yields in the Cash Market
• 15.2 Eurodollar Futures Markets and LIBOR
• 15.2.1 Eurodollar Futures Settlement to Yields
• 15.3 Deriving Swap Rates from ED Futures
• 15.3.1 Eurodollar Futures Versus Swap Markets
• 15.4 Intermarket Spreads
• 15.5 Options on ED Futures
• 15.5.1 Caps, Floors, and Collars on LIBOR
• 15.6 Valuation of Caps
• Suggested Readings and References
• CHAPTER 16 Interest-Rate Swaps
• 16.1 Swaps and Swap-Related Products and Terminology
• 16.1.1 Asset Swaps
• 16.1.2 Diversity of Swap Contracts
• 16.2 Valuation of Swaps
• 16.2.1 Forward Swap
• 16.2.2 ED Futures and Swap Pricing
• 16.2.3 Convexity Adjustment
• 16.3 Swap Spreads
• 16.3.1 Liquidity Factor or the Systemic Risk Factor
• 16.3.2 Credit Risk in the Bank Sector
• 16.3.3 Agency Activities
• 16.4 Risk Management
• 16.4.1 Management of the Credit Risk of Swaps
• 16.5 Swap Bid Rate, Offer Rate, and Bid-Offer Spreads
• 16.6 Swaptions
• 16.6.1 Swaption Parity Relation
• 16.7 Conclusion
• Suggested Readings and References
• CHAPTER 17 Treasury Futures Contracts
• 17.1 Forward Contracts Defined
• 17.2 Futures Contracts Defined
• 17.3 Design of Contractual Features
• 17.3.1 Delivery Specifications
• 17.3.2 Price Limits
• 17.3.3 Margins
• 17.4 Futures Versus Forwards
• 17.5 Treasury Futures Contracts
• 17.5.1 Delivery Options in Treasury Note Futures
• 17.5.2 Conversion Factor
• 17.5.3 Seller’s Option in the September 2007 Contract
• 17.5.3.1 Basis in T-Bond Futures
• 17.5.4 Determination of Delivery
• 17.5.5 Basis after Carry, or Net Basis
• 17.5.6 Implied Repo Rate
• 17.5.7 Duration Bias in Deliveries
• 17.5.8 Hedging Applications
• Suggested Readings and References
• CHAPTER 18 Credit Default Swaps: Single-Name, Portfolio, and Indexes
• 18.1 Credit Default Swaps
• 18.2 Players
• 18.3 Growth of CDS Market and Evolution
• 18.4 Restructuring and Deliverables
• 18.5 Settlement on Credit Events
• 18.6 Valuation of CDS
• 18.6.1 CDS Spreads, Probability of Default, and Recovery Rates
• 18.6.2 Applications
• 18.7 Credit-Linked Notes
• 18.8 Credit Default Indexes
• Suggested Readings and References
• CHAPTER 19 Structured Credit Products: Collateralized Debt Obligations
• 19.1 Collateralized Debt Obligations
• 19.1.1 CDO Structure and Players
• 19.1.2 Types of Cash CDOs
• 19.1.3 Synthetic CDOs
• 19.2 Analysis of CDO Structure
• 19.2.1 Leverage
• 19.2.2 Extent of Subordination, Overcollateralization, and Waterfalls
• 19.2.3 Quality of Collateral Pool and Rating
• 19.3 Growth of the CDO Market
• 19.4 Credit Default Indexes (CDX)
• 19.5 CDX Tranches
• 19.6 Valuation of CDOs
• Suggested Readings and References
• Glossary of Financial Terms
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