Bond Math - The Theory Behind the Formulas
Published on 6. December 2011
Software
Other digital
288 pages
978-1-118-26800-1 (ISBN)
Description
A guide to the theory behind bond math formulas Bond Math explores the ideas and assumptions behind commonly used statistics on risk and return for individual bonds and on fixed income portfolios. But this book is much more than a series of formulas and calculations; the emphasis is on how to think about and use bond math. Author Donald J. Smith, a professor at Boston University and an experienced executive trainer, covers in detail money market rates, periodicity conversions, bond yields to maturity and horizon yields, the implied probability of default, after-tax rates of return, implied forward and spot rates, and duration and convexity. These calculations are used on traditional fixed-rate and zero-coupon bonds, as well as floating-rate notes, inflation-indexed securities, and interest rate swaps. Puts bond math in perspective through discussions of bond portfolios and investment strategies.
Critiques the Bloomberg Yield Analysis (YA) page, indicating which numbers provide reliable information for making decisions about bonds, which are meaningless data, and which can be very misleading to investors Filled with thought-provoking insights and practical advice, this book puts the intricacies of bond math into a clear and logical order.
Critiques the Bloomberg Yield Analysis (YA) page, indicating which numbers provide reliable information for making decisions about bonds, which are meaningless data, and which can be very misleading to investors Filled with thought-provoking insights and practical advice, this book puts the intricacies of bond math into a clear and logical order.
More details
Language
English
Place of publication
New York
United States
Target group
Professional and scholarly
Dimensions
Height: 250 mm
Width: 150 mm
Thickness: 15 mm
Weight
666 gr
ISBN-13
978-1-118-26800-1 (9781118268001)
Copyright in bibliographic data and cover images is held by Nielsen Book Services Limited or by the publishers or by their respective licensors: all rights reserved.
Schweitzer Classification
Person
Donald J. Smith is an award-winning professor at Boston University, where he teaches graduate-level courses on fixed income markets, as well as executive education courses. Professor Smith also consults to commercial and investment banks, financial firms, and law firms. He has written numerous articles for various academic and professional journals, and received his MBA and PhD from the University of California, Berkeley.
Content
Preface xi CHAPTER 1: MoneyMarket Interest Rates 1 Interest Rates in Textbook Theory 2 Money Market Add-on Rates 3 Money Market Discount Rates 6 Two Cash Flows, Many Money Market Rates 9 A History Lesson on Money Market Certificates 12 Periodicity Conversions 13 Treasury Bill Auction Results 15 The Future: Hourly Interest Rates? 20 Conclusion 22 CHAPTER 2: Zero-Coupon Bonds 23 The Story of TIGRS, CATS, LIONS, and STRIPS 24 Yields to Maturity on Zero-Coupon Bonds 27 Horizon Yields and Holding-Period Rates of Return 30 Changes in Bond Prices and Yields 33 Credit Spreads and the Implied Probability of Default 35 Conclusion 38 CHAPTER 3: Prices and Yields on Coupon Bonds 39 Market Demand and Supply 40 Bond Prices and Yields to Maturity in a World of No Arbitrage 44 Some Other Yield Statistics 49 Horizon Yields 53 Some Uses of Yield-to-Maturity Statistics 55 Implied Probability of Default on Coupon Bonds 56 Bond Pricing between Coupon Dates 57 A Real Corporate Bond 60 Conclusion 63 CHAPTER 4: Bond Taxation 65 Basic Bond Taxation 66 Market Discount Bonds 68 A Real Market Discount Corporate Bond 70 Premium Bonds 74 Original Issue Discount Bonds 77 Municipal Bonds 79 Conclusion 82 CHAPTER 5: Yield Curves 83 An Intuitive Forward Curve 84 Classic Theories of the Term Structure of Interest Rates 86 Accurate Implied Forward Rates 91 Money Market Implied Forward Rates 93 Calculating and Using Implied Spot (Zero-Coupon) Rates 96 More Applications for the Implied Spot and Forward Curves 99 Conclusion 105 CHAPTER 6: Duration and Convexity 107 Yield Duration and Convexity Relationships 108 Yield Duration 111 The Relationship between Yield Duration and Maturity 115 Yield Convexity 118 Bloomberg Yield Duration and Convexity 122 Curve Duration and Convexity 127 Conclusion 135 CHAPTER 7: Floaters and Linkers 137 Floating-Rate Notes in General 138 A Simple Floater Valuation Model 139 An Actual Floater 143 Inflation-Indexed Bonds: C-Linkers and P-Linkers 149 Linker Taxation 153 Linker Duration 156 Conclusion 161 CHAPTER 8: Interest Rate Swaps 163 Pricing an Interest Rate Swap 164 Interest Rate Forwards and Futures 168 Inferring the Forward Curve 170 Valuing an Interest Rate Swap 174 Interest Rate Swap Duration and Convexity 179 Conclusion 184 CHAPTER 9: Bond Portfolios 185 Bond Portfolio Statistics in Theory 185 Bond Portfolio Statistics in Practice 189 A Real Bond Portfolio 194 Thoughts on Bond Portfolio Statistics 206 Conclusion 207 CHAPTER 10: Bond Strategies 209 Acting on a Rate View 211 An Interest Rate Swap Overlay Strategy 215 Classic Immunization Theory 218 Immunization Implementation Issues 224 Liability-Driven Investing 226 Closing Thoughts: Target-Duration Bond Funds 227 Technical Appendix 231 Acronyms 249 Bibliographic Notes 251 About the Author 257 Acknowledgments 259 Index 261