Bond Markets, Analysis, and Strategies, 10e

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Bond Markets, Analysis, and Strategies (pg. i)
Title Page (pg. i)
Tenth Edition Title Page (pg. iii)
Contents (pg. vii)
Preface (pg. ix)
Changes from the Ninth Edition (pg. ix)
Instructor Supplements (pg. x)
Acknowledgments (pg. xi)
1 Introduction (pg. 1)
1 Introduction (pg. 1)
Learning Objectives (pg. 1)
Sectors of the U.S. Bond Market (pg. 2)
Overview of Bond Features (pg. 4)
Risks Associated with Investing in Bonds (pg. 8)
Climate Change and Bond Investing (pg. 13)
Overview of the Book (pg. 14)
Questions (pg. 16)
2 Pricing of Bonds (pg. 19)
Learning Objectives (pg. 19)
Review of time value of Money (pg. 19)
Pricing a Bond (pg. 26)
Complications (pg. 32)
Pricing Floating-Rate and Inverse-Floating-Rate Securities (pg. 34)
Price Quotes and Accrued Interest (pg. 36)
Key Points (pg. 40)
Questions (pg. 41)
3 Measuring Yield (pg. 45)
Learning Objectives (pg. 45)
Computing the Yield or Internal Rate of Return on any Investment (pg. 45)
Conventional Yield Measures (pg. 49)
Potential Sources of a Bond’s Dollar Return (pg. 58)
Total Return (pg. 61)
Applications of the Total Return (Horizon Analysis) (pg. 66)
Calculating Yield Changes (pg. 66)
Key Points (pg. 67)
Questions (pg. 68)
4 Bond Price Volatility (pg. 71)
Learning Objectives (pg. 71)
Review of the Price–Yield Relationship for Option-Free Bonds (pg. 72)
Price-Volatility Characteristics of Option-Free Bonds (pg. 73)
Measures of Bond Price Volatility (pg. 75)
Convexity (pg. 86)
Additional Concerns when Using Duration (pg. 96)
Do not think of Duration as a Measure of Time (pg. 96)
Approximating a Bond’s Duration and Convexity Measure (pg. 97)
Measuring a Bond Portfolio’s Responsiveness to Nonparallel Changes in Interest Rates (pg. 100)
Key Points (pg. 103)
Questions (pg. 105)
5 The Theory and History of Interest Rates (pg. 109)
Learning Objectives (pg. 109)
Interest-Rate Theories (pg. 110)
Real and Nominal Interest Rates: Fisher’s Law (pg. 115)
Natural Rate of Interest (pg. 116)
Risk-Free Interest Rate and the Existence of a Safe Asset (pg. 117)
Negative Interest Rates (pg. 118)
Historical Interest Rates in the United States (pg. 120)
Key Points (pg. 122)
Questions (pg. 123)
14011_006 (pg. 125)
Learning Objectives (pg. 125)
Base Interest Rate (pg. 126)
Benchmark Spread (pg. 126)
Term Structure of Interest Rates (pg. 131)
Swap Rate Yield Curve (pg. 152)
Reference Interest Rates for Financial Products (pg. 154)
Key Points (pg. 156)
Questions (pg. 157)
7 Treasury and Federal Agency Securities (pg. 161)
Learning Objectives (pg. 161)
Treasury Securities (pg. 161)
Stripped Treasury Securities (pg. 167)
Federal Agency Securities (pg. 168)
Key Points (pg. 171)
Questions (pg. 172)
8 Corporat Debt Investments (pg. 175)
Learning Objectives (pg. 175)
Seniority of Debt in a Corporation’s Capital Structure (pg. 176)
Bankruptcy and Creditor Rights (pg. 177)
Corporate Debt Ratings (pg. 179)
Corporate Bonds (pg. 182)
Medium-Term Notes (pg. 189)
Commercial Paper (pg. 192)
Bank Loans (pg. 194)
Default Risk for Corporate Debt Instruments (pg. 199)
Corporate Downgrade Risk (pg. 202)
Corporate Credit Spread Risk (pg. 202)
Key Points (pg. 204)
Questions (pg. 205)
9 Municipal Securities (pg. 209)
14011_009 (pg. 209)
Learning Objectives (pg. 209)
Types and Features of Municipal Securities (pg. 210)
Municipal Money Market Products (pg. 215)
Municipal Variable-Rate Securities (pg. 216)
Credit Risk (pg. 218)
Risks Associated with Investing in Municipal Securities (pg. 221)
Yields on Municipal Bonds (pg. 221)
Municipal Bond Market (pg. 223)
The Taxable Municipal Bond Market (pg. 225)
Key Points (pg. 225)
Questions (pg. 227)
10 International Bonds (pg. 229)
Learning Objectives (pg. 229)
Developed, Emerging, and Frontier Capital Markets (pg. 230)
Classification of Global Bond Markets (pg. 231)
Non-U.S. Bond Issuers and Bond Structures (pg. 232)
Foreign Exchange Risk and Bond Returns (pg. 234)
Bonds Issued by Non-U.S. Entities (pg. 235)
Global Bond Indexes (pg. 254)
Appendix: Foreign Exchange Rates (pg. 255)
Key Points (pg. 256)
Questions (pg. 257)
11 Residential Mortgage Loans (pg. 259)
Learning Objectives (pg. 259)
Origination of Residential Mortgage Loans (pg. 260)
Types of Residential Mortgage Loans (pg. 261)
Conforming Loans (pg. 269)
Risks Associated with Investing in Mortgage Loans (pg. 270)
Key Points (pg. 271)
Questions (pg. 271)
14011_012 (pg. 273)
Learning Objectives (pg. 273)
Sectors of the Residential Mortgage-Backed Security Market (pg. 274)
General Description of an Agency Mortgage Pass-Through Security (pg. 276)
Issuers of Agency Pass-Through Securities (pg. 277)
Prepayment Conventions and Cash Flow (pg. 278)
Factors Affecting Prepayments and Prepayment Modeling (pg. 286)
Cash Flow Yield (pg. 292)
Prepayment Risk and Asset/Liability Management (pg. 294)
Secondary Market Trading (pg. 295)
TBA Coupons (pg. 298)
Specified Trades (pg. 299)
Key Points (pg. 300)
Questions (pg. 302)
13 Agency Collateralized Mortgage Obligations and Stripped Mortgage-Backed Securities (pg. 307)
Learning Objectives (pg. 307)
Agency Collateralized Mortgage Obligations (pg. 308)
Agency Stripped Mortgage-Backed Securities (pg. 331)
Key Points (pg. 343)
Questions (pg. 344)
14 Nonagency Residential Mortgage-Backed Securities (pg. 349)
Learning Objectives (pg. 349)
Types of RMBS (pg. 350)
Credit Enhancement (pg. 350)
Cash Flow for Nonagency Rmbs (pg. 356)
Key Points (pg. 361)
Questions (pg. 363)
15 Commercial Mortgage Loans and Commercial Mortgage-Backed Securities (pg. 365)
Learning Objectives (pg. 365)
Commercial Mortgage Loans (pg. 366)
Commercial Mortgage-Backed Securities (pg. 368)
Types of Deals (pg. 373)
Key Points (pg. 375)
Questions (pg. 376)
16 Asset-Backed Securities (pg. 379)
Learning Objectives (pg. 379)
Creation of an Asset-Backed Security (pg. 380)
Collateral type and Securitization Structure (pg. 385)
Credit Risks Associated with Investing in Asset-Backed Securities (pg. 387)
Review of Several major types of Asset-Backed Securities (pg. 390)
Dodd-Frank Wall Street Reform and Consumer Protection Act (pg. 400)
Key Points (pg. 401)
Questions (pg. 401)
17 Collective Investment Vehicles (pg. 403)
14011_017 (pg. 403)
Learning Objectives (pg. 403)
Investing in COLLECTIVE Investment Vehicles (pg. 404)
Investment Company Shares (pg. 405)
Exchange-Traded Funds (pg. 409)
Hedge Funds (pg. 415)
Real Estate Investment Mortgage Trusts (pg. 417)
Key Points (pg. 418)
Questions (pg. 420)
14011_018 (pg. 423)
Learning Objectives (pg. 423)
Liquidity and Resilency of a Market (pg. 425)
The Secondary Corporate Bond Market and its Regulation (pg. 428)
Trading (Transaction) Costs (pg. 430)
Pricing Vendors (pg. 432)
Processing a Trade (pg. 433)
Market Infrastructure (pg. 434)
Key Points (pg. 439)
Questions (pg. 442)
14011_019 (pg. 445)
Learning Objectives (pg. 445)
Drawbacks of Traditional Yield Spread Analysis (pg. 446)
Static Spread: An Alternative to Yield Spread (pg. 446)
Callable Bonds and their Investment Characteristics (pg. 450)
Components of a Bond with an Embedded Option (pg. 454)
Valuation Model (pg. 455)
Option-Adjusted Spread (pg. 469)
Effective Duration and Convexity (pg. 470)
Key Points (pg. 472)
Questions (pg. 472)
14011_020 (pg. 477)
Learning Objectives (pg. 477)
Static Cash Flow Yield Methodology (pg. 478)
Monte Carlo Simulation Methodology (pg. 487)
Illustrations (pg. 494)
Total Return Analysis (pg. 499)
Key Points (pg. 502)
Appendix: Market-Based Estimates of Duration for RMBS (pg. 503)
Questions (pg. 506)
14011_021 (pg. 511)
Learning Objectives (pg. 511)
Convertible Bond Provisions (pg. 511)
Categorization of Convertible Securities (pg. 513)
Basic Analytics and Concepts for Convertible Bond Analysis (pg. 515)
Option Measures (pg. 519)
Profile of a Convertible Bond (pg. 521)
Pros and Cons of Investing in a Convertible Bond (pg. 522)
Convertible Bond Arbitrage (pg. 524)
Options Approach to Valuation (pg. 526)
Key Points (pg. 527)
Questions (pg. 528)
14011_022 (pg. 531)
Learning Objectives (pg. 531)
Overview of Corporate Bond Credit Analysis (pg. 532)
Analysis of Business Risk (pg. 534)
Corporate Governance Risk (pg. 536)
Financial Risk (pg. 537)
The Investment Decision (pg. 541)
Corporate Bond Credit Analysis and Equity Analysis (pg. 541)
Case Study: Credit Analysis of Sirius Xm Holdings Inc. (pg. 542)
Case Study: Sino-Forest Corporation (pg. 552)
Key Points (pg. 558)
Questions (pg. 559)
14011_023 (pg. 561)
Learning Objectives (pg. 561)
Difficulties in Credit Risk Modeling (pg. 562)
Overview of Credit Risk Modeling (pg. 563)
Credit Ratings Versus Credit Risk Models (pg. 564)
Structural Models (pg. 564)
Estimating Portfolio Credit Risk: Default Correlation and Copulas (pg. 570)
Reduced-Form Models (pg. 571)
Empirical Evidence: Credit Ratings, Structural Models, and Reduced-Form Models (pg. 574)
An Application of Credit Risk Modeling (pg. 575)
Incomplete-Information Models (pg. 579)
Key Points (pg. 580)
Questions (pg. 580)
14011_024 (pg. 583)
Learning Objectives (pg. 583)
The Asset Allocation Decision (pg. 584)
Portfolio Management Team (pg. 585)
Spectrum of Bond Portfolio Strategies (pg. 586)
Bond Benchmarks (pg. 589)
The Primary Risk Factors (pg. 594)
Top-Down Versus Bottom-Up Portfolio Construction and Management (pg. 595)
Discretionary Versus Quantitative Active Bond Portfolio Strategies (pg. 596)
Discretionary Active Bond Portfolio Strategies (pg. 598)
Smart Beta Bond Strategies (pg. 612)
The Use of Leverage (pg. 614)
Backtesting Bond Portfolio Strategies (pg. 620)
Key Points (pg. 622)
Questions (pg. 623)
25 Bond Portfolio Construction (pg. 629)
14011_025 (pg. 629)
Learning Objectives (pg. 629)
Brief Review Of Portfolio Theory and Risk Decomposition (pg. 629)
Application of Portfolio Theory to Bond Portfolio Construction (pg. 631)
Tracking Error (pg. 633)
Cell-Based Approach to Bond Portfolio Construction (pg. 637)
Portfolio Construction with Multi-Factor Models (pg. 639)
Key Points (pg. 654)
Questions (pg. 655)
14011_026 (pg. 661)
Learning Objectives (pg. 661)
Risk–Return for Corporate Bonds Versus Equities (pg. 662)
Measuring Credit Spread Sensitivity (pg. 663)
Empirical Duration for Corporate Bonds (pg. 665)
Corporate Bond Benchmarks (pg. 672)
Credit Relative Value Strategies (pg. 673)
Constraint-Tolerant Investing (pg. 677)
Using Credit Risk Modeling to Construct Corporate Bond Portfolios (pg. 680)
Corporate Bond Style Factor Investing (pg. 682)
Key Points (pg. 688)
Questions (pg. 690)
27 Liability-Driven Investing for Defined Benefit Pension Plans (pg. 693)
Learning Objectives (pg. 693)
Understanding the Liabilities of a DB Pension Plan (pg. 694)
LDI Strategies (pg. 697)
DE-Risking Solutions to Mitigate Risk (pg. 700)
Strategies for Hedging Interest-Rate Risk (pg. 701)
Key Points (pg. 709)
Questions (pg. 711)
28 Bond Performance Measurement and Evaluation (pg. 713)
Learning Objectives (pg. 713)
Requirements for a Bond Performance and Attribution Analysis Process (pg. 713)
Performance Measurement (pg. 714)
Performance Attribution Analysis (pg. 720)
Key Points (pg. 726)
Questions (pg. 727)
29 Interest-Rate Futures Contracts (pg. 731)
Learning Objectives (pg. 731)
Mechanics of Futures Trading (pg. 732)
Futures Versus Forward Contracts (pg. 734)
Risk and Return Characteristics of Futures Contracts (pg. 735)
Interest-Rate Futures Contracts (pg. 735)
Pricing and Arbitrage in the Interest-Rate Futures Market (pg. 744)
Bond Portfolio Management Applications (pg. 752)
Key Points (pg. 770)
Questions (pg. 771)
30 Interest-Rate Options (pg. 775)
Learning Objectives (pg. 775)
Options Defined (pg. 776)
Differences Between an Option and a Futures Contract (pg. 776)
Types of Interest-Rate Options (pg. 776)
Intrinsic Value and Time Value of an Option (pg. 779)
Profit and Loss Profiles for Simple Naked Option Strategies (pg. 781)
Put–Call Parity Relationship and Equivalent Positions (pg. 793)
Option Price (pg. 795)
Models for Pricing Options (pg. 796)
Sensitivity of Option Price to Change in Factors (pg. 805)
Hedge Strategies (pg. 809)
Key Points (pg. 815)
Questions (pg. 816)
31 Interest-Rate Swaps, Forward-Rate Agreements, Caps, and Floors (pg. 819)
Learning Objectives (pg. 819)
Interest-Rate Swaps (pg. 819)
Forward Rate Agreements (pg. 842)
Interest-Rate Caps and Floors (pg. 844)
Key Points (pg. 851)
Questions (pg. 852)
32 Credit Default Swaps (pg. 857)
Learning Objectives (pg. 857)
Credit Events (pg. 858)
Credit Events for an Asset-Backed Security (pg. 860)
Single-Name CDS (pg. 861)
Index CDS (pg. 870)
Economic Interpretation of a CDS and an Index CDS (pg. 874)
Using CDS for Controlling Credit Risk (pg. 876)
Key Points (pg. 877)
Questions (pg. 878)
Appendix_ The Investment Management Agreement (pg. 881)
Sample Investment Management Agreement (pg. 882)

Bond Markets, Analysis, and Strategies (pg. i)

Title Page (pg. i)

Tenth Edition Title Page (pg. iii)

Contents (pg. vii)

Preface (pg. ix)

Changes from the Ninth Edition (pg. ix)

Instructor Supplements (pg. x)

Acknowledgments (pg. xi)

1 Introduction (pg. 1)

1 Introduction (pg. 1)

Learning Objectives (pg. 1)

Sectors of the U.S. Bond Market (pg. 2)

Overview of Bond Features (pg. 4)

Risks Associated with Investing in Bonds (pg. 8)

Climate Change and Bond Investing (pg. 13)

Overview of the Book (pg. 14)

Questions (pg. 16)

2 Pricing of Bonds (pg. 19)

Learning Objectives (pg. 19)

Review of time value of Money (pg. 19)

Pricing a Bond (pg. 26)

Complications (pg. 32)

Pricing Floating-Rate and Inverse-Floating-Rate Securities (pg. 34)

Price Quotes and Accrued Interest (pg. 36)

Key Points (pg. 40)

Questions (pg. 41)

3 Measuring Yield (pg. 45)

Learning Objectives (pg. 45)

Computing the Yield or Internal Rate of Return on any Investment (pg. 45)

Conventional Yield Measures (pg. 49)

Potential Sources of a Bond’s Dollar Return (pg. 58)

Total Return (pg. 61)

Applications of the Total Return (Horizon Analysis) (pg. 66)

Calculating Yield Changes (pg. 66)

Key Points (pg. 67)

Questions (pg. 68)

4 Bond Price Volatility (pg. 71)

Learning Objectives (pg. 71)

Review of the Price–Yield Relationship for Option-Free Bonds (pg. 72)

Price-Volatility Characteristics of Option-Free Bonds (pg. 73)

Measures of Bond Price Volatility (pg. 75)

Convexity (pg. 86)

Additional Concerns when Using Duration (pg. 96)

Do not think of Duration as a Measure of Time (pg. 96)

Approximating a Bond’s Duration and Convexity Measure (pg. 97)

Measuring a Bond Portfolio’s Responsiveness to Nonparallel Changes in Interest Rates (pg. 100)

Key Points (pg. 103)

Questions (pg. 105)

5 The Theory and History of Interest Rates (pg. 109)

Learning Objectives (pg. 109)

Interest-Rate Theories (pg. 110)

Real and Nominal Interest Rates: Fisher’s Law (pg. 115)

Natural Rate of Interest (pg. 116)

Risk-Free Interest Rate and the Existence of a Safe Asset (pg. 117)

Negative Interest Rates (pg. 118)

Historical Interest Rates in the United States (pg. 120)

Key Points (pg. 122)

Questions (pg. 123)

14011_006 (pg. 125)

Learning Objectives (pg. 125)

Base Interest Rate (pg. 126)

Benchmark Spread (pg. 126)

Term Structure of Interest Rates (pg. 131)

Swap Rate Yield Curve (pg. 152)

Reference Interest Rates for Financial Products (pg. 154)

Key Points (pg. 156)

Questions (pg. 157)

7 Treasury and Federal Agency Securities (pg. 161)

Learning Objectives (pg. 161)

Treasury Securities (pg. 161)

Stripped Treasury Securities (pg. 167)

Federal Agency Securities (pg. 168)

Key Points (pg. 171)

Questions (pg. 172)

8 Corporat Debt Investments (pg. 175)

Learning Objectives (pg. 175)

Seniority of Debt in a Corporation’s Capital Structure (pg. 176)

Bankruptcy and Creditor Rights (pg. 177)

Corporate Debt Ratings (pg. 179)

Corporate Bonds (pg. 182)

Medium-Term Notes (pg. 189)

Commercial Paper (pg. 192)

Bank Loans (pg. 194)

Default Risk for Corporate Debt Instruments (pg. 199)

Corporate Downgrade Risk (pg. 202)

Corporate Credit Spread Risk (pg. 202)

Key Points (pg. 204)

Questions (pg. 205)

9 Municipal Securities (pg. 209)

14011_009 (pg. 209)

Learning Objectives (pg. 209)

Types and Features of Municipal Securities (pg. 210)

Municipal Money Market Products (pg. 215)

Municipal Variable-Rate Securities (pg. 216)

Credit Risk (pg. 218)

Risks Associated with Investing in Municipal Securities (pg. 221)

Yields on Municipal Bonds (pg. 221)

Municipal Bond Market (pg. 223)

The Taxable Municipal Bond Market (pg. 225)

Key Points (pg. 225)

Questions (pg. 227)

10 International Bonds (pg. 229)

Learning Objectives (pg. 229)

Developed, Emerging, and Frontier Capital Markets (pg. 230)

Classification of Global Bond Markets (pg. 231)

Non-U.S. Bond Issuers and Bond Structures (pg. 232)

Foreign Exchange Risk and Bond Returns (pg. 234)

Bonds Issued by Non-U.S. Entities (pg. 235)

Global Bond Indexes (pg. 254)

Appendix: Foreign Exchange Rates (pg. 255)

Key Points (pg. 256)

Questions (pg. 257)

11 Residential Mortgage Loans (pg. 259)

Learning Objectives (pg. 259)

Origination of Residential Mortgage Loans (pg. 260)

Types of Residential Mortgage Loans (pg. 261)

Conforming Loans (pg. 269)

Risks Associated with Investing in Mortgage Loans (pg. 270)

Key Points (pg. 271)

Questions (pg. 271)

14011_012 (pg. 273)

Learning Objectives (pg. 273)

Sectors of the Residential Mortgage-Backed Security Market (pg. 274)

General Description of an Agency Mortgage Pass-Through Security (pg. 276)

Issuers of Agency Pass-Through Securities (pg. 277)

Prepayment Conventions and Cash Flow (pg. 278)

Factors Affecting Prepayments and Prepayment Modeling (pg. 286)

Cash Flow Yield (pg. 292)

Prepayment Risk and Asset/Liability Management (pg. 294)

Secondary Market Trading (pg. 295)

TBA Coupons (pg. 298)

Specified Trades (pg. 299)

Key Points (pg. 300)

Questions (pg. 302)

13 Agency Collateralized Mortgage Obligations and Stripped Mortgage-Backed Securities (pg. 307)

Learning Objectives (pg. 307)

Agency Collateralized Mortgage Obligations (pg. 308)

Agency Stripped Mortgage-Backed Securities (pg. 331)

Key Points (pg. 343)

Questions (pg. 344)

14 Nonagency Residential Mortgage-Backed Securities (pg. 349)

Learning Objectives (pg. 349)

Types of RMBS (pg. 350)

Credit Enhancement (pg. 350)

Cash Flow for Nonagency Rmbs (pg. 356)

Key Points (pg. 361)

Questions (pg. 363)

15 Commercial Mortgage Loans and Commercial Mortgage-Backed Securities (pg. 365)

Learning Objectives (pg. 365)

Commercial Mortgage Loans (pg. 366)

Commercial Mortgage-Backed Securities (pg. 368)

Types of Deals (pg. 373)

Key Points (pg. 375)

Questions (pg. 376)

16 Asset-Backed Securities (pg. 379)

Learning Objectives (pg. 379)

Creation of an Asset-Backed Security (pg. 380)

Collateral type and Securitization Structure (pg. 385)

Credit Risks Associated with Investing in Asset-Backed Securities (pg. 387)

Review of Several major types of Asset-Backed Securities (pg. 390)

Dodd-Frank Wall Street Reform and Consumer Protection Act (pg. 400)

Key Points (pg. 401)

Questions (pg. 401)

17 Collective Investment Vehicles (pg. 403)

14011_017 (pg. 403)

Learning Objectives (pg. 403)

Investing in COLLECTIVE Investment Vehicles (pg. 404)

Investment Company Shares (pg. 405)

Exchange-Traded Funds (pg. 409)

Hedge Funds (pg. 415)

Real Estate Investment Mortgage Trusts (pg. 417)

Key Points (pg. 418)

Questions (pg. 420)

14011_018 (pg. 423)

Learning Objectives (pg. 423)

Liquidity and Resilency of a Market (pg. 425)

The Secondary Corporate Bond Market and its Regulation (pg. 428)

Trading (Transaction) Costs (pg. 430)

Pricing Vendors (pg. 432)

Processing a Trade (pg. 433)

Market Infrastructure (pg. 434)

Key Points (pg. 439)

Questions (pg. 442)

14011_019 (pg. 445)

Learning Objectives (pg. 445)

Drawbacks of Traditional Yield Spread Analysis (pg. 446)

Static Spread: An Alternative to Yield Spread (pg. 446)

Callable Bonds and their Investment Characteristics (pg. 450)

Components of a Bond with an Embedded Option (pg. 454)

Valuation Model (pg. 455)

Option-Adjusted Spread (pg. 469)

Effective Duration and Convexity (pg. 470)

Key Points (pg. 472)

Questions (pg. 472)

14011_020 (pg. 477)

Learning Objectives (pg. 477)

Static Cash Flow Yield Methodology (pg. 478)

Monte Carlo Simulation Methodology (pg. 487)

Illustrations (pg. 494)

Total Return Analysis (pg. 499)

Key Points (pg. 502)

Appendix: Market-Based Estimates of Duration for RMBS (pg. 503)

Questions (pg. 506)

14011_021 (pg. 511)

Learning Objectives (pg. 511)

Convertible Bond Provisions (pg. 511)

Categorization of Convertible Securities (pg. 513)

Basic Analytics and Concepts for Convertible Bond Analysis (pg. 515)

Option Measures (pg. 519)

Profile of a Convertible Bond (pg. 521)

Pros and Cons of Investing in a Convertible Bond (pg. 522)

Convertible Bond Arbitrage (pg. 524)

Options Approach to Valuation (pg. 526)

Key Points (pg. 527)

Questions (pg. 528)

14011_022 (pg. 531)

Learning Objectives (pg. 531)

Overview of Corporate Bond Credit Analysis (pg. 532)

Analysis of Business Risk (pg. 534)

Corporate Governance Risk (pg. 536)

Financial Risk (pg. 537)

The Investment Decision (pg. 541)

Corporate Bond Credit Analysis and Equity Analysis (pg. 541)

Case Study: Credit Analysis of Sirius Xm Holdings Inc. (pg. 542)

Case Study: Sino-Forest Corporation (pg. 552)

Key Points (pg. 558)

Questions (pg. 559)

14011_023 (pg. 561)

Learning Objectives (pg. 561)

Difficulties in Credit Risk Modeling (pg. 562)

Overview of Credit Risk Modeling (pg. 563)

Credit Ratings Versus Credit Risk Models (pg. 564)

Structural Models (pg. 564)

Estimating Portfolio Credit Risk: Default Correlation and Copulas (pg. 570)

Reduced-Form Models (pg. 571)

Empirical Evidence: Credit Ratings, Structural Models, and Reduced-Form Models (pg. 574)

An Application of Credit Risk Modeling (pg. 575)

Incomplete-Information Models (pg. 579)

Key Points (pg. 580)

Questions (pg. 580)

14011_024 (pg. 583)

Learning Objectives (pg. 583)

The Asset Allocation Decision (pg. 584)

Portfolio Management Team (pg. 585)

Spectrum of Bond Portfolio Strategies (pg. 586)

Bond Benchmarks (pg. 589)

The Primary Risk Factors (pg. 594)

Top-Down Versus Bottom-Up Portfolio Construction and Management (pg. 595)

Discretionary Versus Quantitative Active Bond Portfolio Strategies (pg. 596)

Discretionary Active Bond Portfolio Strategies (pg. 598)

Smart Beta Bond Strategies (pg. 612)

The Use of Leverage (pg. 614)

Backtesting Bond Portfolio Strategies (pg. 620)

Key Points (pg. 622)

Questions (pg. 623)

25 Bond Portfolio Construction (pg. 629)

14011_025 (pg. 629)

Learning Objectives (pg. 629)

Brief Review Of Portfolio Theory and Risk Decomposition (pg. 629)

Application of Portfolio Theory to Bond Portfolio Construction (pg. 631)

Tracking Error (pg. 633)

Cell-Based Approach to Bond Portfolio Construction (pg. 637)

Portfolio Construction with Multi-Factor Models (pg. 639)

Key Points (pg. 654)

Questions (pg. 655)

14011_026 (pg. 661)

Learning Objectives (pg. 661)

Risk–Return for Corporate Bonds Versus Equities (pg. 662)

Measuring Credit Spread Sensitivity (pg. 663)

Empirical Duration for Corporate Bonds (pg. 665)

Corporate Bond Benchmarks (pg. 672)

Credit Relative Value Strategies (pg. 673)

Constraint-Tolerant Investing (pg. 677)

Using Credit Risk Modeling to Construct Corporate Bond Portfolios (pg. 680)

Corporate Bond Style Factor Investing (pg. 682)

Key Points (pg. 688)

Questions (pg. 690)

27 Liability-Driven Investing for Defined Benefit Pension Plans (pg. 693)

Learning Objectives (pg. 693)

Understanding the Liabilities of a DB Pension Plan (pg. 694)

LDI Strategies (pg. 697)

DE-Risking Solutions to Mitigate Risk (pg. 700)

Strategies for Hedging Interest-Rate Risk (pg. 701)

Key Points (pg. 709)

Questions (pg. 711)

28 Bond Performance Measurement and Evaluation (pg. 713)

Learning Objectives (pg. 713)

Requirements for a Bond Performance and Attribution Analysis Process (pg. 713)

Performance Measurement (pg. 714)

Performance Attribution Analysis (pg. 720)

Key Points (pg. 726)

Questions (pg. 727)

29 Interest-Rate Futures Contracts (pg. 731)

Learning Objectives (pg. 731)

Mechanics of Futures Trading (pg. 732)

Futures Versus Forward Contracts (pg. 734)

Risk and Return Characteristics of Futures Contracts (pg. 735)

Interest-Rate Futures Contracts (pg. 735)

Pricing and Arbitrage in the Interest-Rate Futures Market (pg. 744)

Bond Portfolio Management Applications (pg. 752)

Key Points (pg. 770)

Questions (pg. 771)

30 Interest-Rate Options (pg. 775)

Learning Objectives (pg. 775)

Options Defined (pg. 776)

Differences Between an Option and a Futures Contract (pg. 776)

Types of Interest-Rate Options (pg. 776)

Intrinsic Value and Time Value of an Option (pg. 779)

Profit and Loss Profiles for Simple Naked Option Strategies (pg. 781)

Put–Call Parity Relationship and Equivalent Positions (pg. 793)

Option Price (pg. 795)

Models for Pricing Options (pg. 796)

Sensitivity of Option Price to Change in Factors (pg. 805)

Hedge Strategies (pg. 809)

Key Points (pg. 815)

Questions (pg. 816)

31 Interest-Rate Swaps, Forward-Rate Agreements, Caps, and Floors (pg. 819)

Learning Objectives (pg. 819)

Interest-Rate Swaps (pg. 819)

Forward Rate Agreements (pg. 842)

Interest-Rate Caps and Floors (pg. 844)

Key Points (pg. 851)

Questions (pg. 852)

32 Credit Default Swaps (pg. 857)

Learning Objectives (pg. 857)

Credit Events (pg. 858)

Credit Events for an Asset-Backed Security (pg. 860)

Single-Name CDS (pg. 861)

Index CDS (pg. 870)

Economic Interpretation of a CDS and an Index CDS (pg. 874)

Using CDS for Controlling Credit Risk (pg. 876)

Key Points (pg. 877)

Questions (pg. 878)

Appendix_ The Investment Management Agreement (pg. 881)

Sample Investment Management Agreement (pg. 882)

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