Fixed Income Analysis

Foreword xv Preface xvii Acknowledgments xix About the CFA Investment Series xxi PART I Fixed-Income Essentials CHAPTER 1 Fixed-Income Securities: Defining Elements 3 Learning Outcomes 3 1. Introduction 3 2. Overview of a Fixed-Income Security 4 3. Legal, Regulatory, and Tax Considerations 10 4. Structure of a Bond's Cash Flows 23 5. Bonds with Contingency Provisions 34 6. Summary 41 Problems 43 CHAPTER 2 Fixed-Income Markets: Issuance, Trading, and Funding 45 Learning Outcomes 45 1. Introduction 45 2. Overview of Global Fixed-Income Markets 46 3. Primary and Secondary Bond Markets 58 4. Sovereign Bonds 66 5. Non-Sovereign Government, Quasi-Government, and Supranational Bonds 69 6. Corporate Debt 71 7. Short-Term Funding Alternatives Available to Banks 80 8. Summary 86 Problems 88 CHAPTER 3 Introduction to Fixed-Income Valuation 91 Learning Outcomes 91 1. Introduction 91 2. Bond Prices and the Time Value of Money 92 3. Prices and Yields: Conventions for Quotes and Calculations 105 4. The Maturity Structure of Interest Rates 128 5. Yield Spreads 136 6. Summary 141 Problems 143 PART II Analysis of Risk CHAPTER 4 Understanding Fixed-Income Risk and Return 153 Learning Outcomes 153 1. Introduction 154 2. Sources of Return 154 3. Interest Rate Risk on Fixed-Rate Bonds 162 4. Interest Rate Risk and the Investment Horizon 195 5. Credit and Liquidity Risk 201 6. Summary 202 Problems 205 CHAPTER 5 Fundamentals of Credit Analysis 211 Learning Outcomes 211 1. Introduction 211 2. Credit Risk 212 3. Capital Structure, Seniority Ranking, and Recovery Rates 214 4. Ratings Agencies, Credit Ratings, and Their Role in the Debt Markets 220 5. Traditional Credit Analysis: Corporate Debt Securities 229 6. Credit Risk vs. Return: Yields and Spreads 249 7. Special Considerations of High-Yield, Sovereign, and Non-Sovereign Credit Analysis 258 8. Summary 272 Problems 275 CHAPTER 6 Credit Analysis Models 279 Learning Outcomes 279 1. Introduction 279 2. Measures of Credit Risk 281 3. Traditional Credit Models 283 4. Structural Models 289 5. Reduced Form Models 297 6. The Term Structure of Credit Spreads 308 7. Asset-Backed Securities 315 8. Summary 317 References 318 Problems 318 PART III Asset-Backed Securities CHAPTER 7 Introduction to Asset-Backed Securities 323 Learning Outcomes 323 1. Introduction 323 2. Benefits of Securitization for Economies and Financial Markets 324 3. The Securitization Process 326 4. Residential Mortgage Loans 335 5. Residential Mortgage-Backed Securities 338 6. Commercial Mortgage-Backed Securities 352 7. Non-Mortgage Asset-Backed Securities 355 8. Collateralized Debt Obligations 359 9. Summary 363 References 365 Problems 365 PART IV Valuation CHAPTER 8 The Arbitrage-Free Valuation Framework 371 Learning Outcomes 371 1. Introduction 371 2. The Meaning of Arbitrage-Free Valuation 372 3. Interest Rate Trees and Arbitrage-Free Valuation 375 4. Monte Carlo Method 393 5. Summary 395 Problems 396 CHAPTER 9 Valuation and Analysis: Bonds with Embedded Options 401 Learning Outcomes 401 1. Introduction 402 2. Overview of Embedded Options 402 3. Valuation and Analysis of Callable and Putable Bonds 407 4. Interest Rate Risk of Bonds with Embedded Options 432 5. Valuation and Analysis of Capped and Floored Floating-Rate Bonds 444 6. Valuation and Analysis of Convertible Bonds 450 7. Bond Analytics 462 8. Summary 463 Problems 465 PART V Term Structure Analysis CHAPTER 10 The Term Structure and Interest Rate Dynamics 473 Learning Outcomes 473 1. Introduction 474 2. Spot Rates and Forward Rates 474 3. The Swap Rate Curve 493 4. Traditional Theories of the Term Structure of Interest Rates 502 5. Modern Term Structure Models 507 6. Yield Curve Factor Models 515 7. Summary 524 References 525 Problems 525 PART VI Fixed-Income Portfolio Management CHAPTER 11 Fixed-Income Portfolio Management--Part I 531 Learning Outcomes 531 1. Introduction 532 2. A Framework for Fixed-Income Portfolio Management 532 3. Managing Funds against a Bond Market Index 534 4. Managing Funds against Liabilities 555 5. Summary 578 Problems 580 CHAPTER 12 Fixed-Income Portfolio Management--Part II 585 Learning Outcomes 585 5. Other Fixed-Income Strategies 586 6. International Bond Investing 608 7. Selecting a Fixed-Income Manager 620 8. Summary 624 Problems 625 CHAPTER 13 Relative-Value Methodologies for Global Credit Bond Portfolio Management 633 Learning Outcomes 633 1. Introduction 633 2. Credit Relative-Value Analysis 636 A. Relative Value 638 B. Classic Relative-Value Analysis 638 C. Relative-Value Methodologies 640 3. Total Return Analysis 640 4. Primary Market Analysis 640 A. The Effect of Market-Structure Dynamics 641 B. The Effect of Product Structure 641 5. Liquidity and Trading Analysis 642 6. Secondary Trade Rationales 642 A. Popular Reasons for Trading 643 B. Trading Constraints 645 7. Spread Analysis 647 A. Alternative Spread Measures 647 B. Closer Look at Swap Spreads 648 C. Spread Tools 649 8. Structural Analysis 650 A. Bullets 651 B. Callables 652 C. Sinking Funds 652 D. Putables 653 9. Credit Curve Analysis 654 10. Credit Analysis 655 11. Asset Allocation/Sector Rotation 655 12. Summary 657 Problems 658 Glossary 667 About the Editors and Authors 683 About the CFA Program 691 Index 693