Introduction to Fixed-Income Analysis and Portfolio Management
by Fabozzi, Fabozzi
| ISBN: 9780262381444 | Copyright 2024
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A concise but comprehensive introduction to fixed-income analysis for undergraduate and graduate students.
Offering more concise and less technical coverage of the material featured in the classic text Bond Markets, Analysis, and Strategies, this streamlined book is rightsized for a one-semester fixed-income course. In accessible terms, Frank Fabozzi describes the sectors of the fixed-income market, details how to value fixed-income instruments, explains how to measure interest rate risk, and demonstrates how to manage a fixed income portfolio. Key concepts are illustrated with extensive examples and exercises, and end-of-chapter questions invite further research. The result is an incisive but approachable introduction to fixed-income analysis for undergraduate finance and business students.
•Comprehensive coverage of fixed-income markets
•Easy-to-understand framing of mathematical concepts accommodates a wide readership with varying levels of mathematical expertise
•Extensive illustrations and examples animate analytical chapters
•Written by an expert with deep experience in the asset management industry and the classroom
•Pragmatic modular structuring of content enables adaptability to different curricula
•Instructor resources available
| Expand/Collapse All | |
|---|---|
| Cover (pg. Cover) | |
| Contents (pg. v) | |
| Preface (pg. vii) | |
| Acknowledgments (pg. xiii) | |
| About the Author (pg. xv) | |
| Where Do You Want to Be? (pg. xvii) | |
| Part I: Introduction (pg. 1) | |
| 1. Features and Attributes of Fixed-Income Instruments (pg. 3) | |
| Fixed-Income Instrument, Defined (pg. 4) | |
| The Debt Market (pg. 5) | |
| Overview of Bond Features (pg. 7) | |
| Risks Associated with Investing in Debt Instruments (pg. 10) | |
| Key Points (pg. 13) | |
| Questions (pg. 14) | |
| Internet Research Discussion Questions (pg. 15) | |
| 2. All about Interest Rates (pg. 17) | |
| Economic Theories of the Determinants of the Level of Interest Rates (pg. 19) | |
| Real and Nominal Interest Rates (pg. 21) | |
| The Natural Rate of Interest (pg. 21) | |
| The Risk-Free Interest Rate and the Existence of a Safe Asset (pg. 22) | |
| Central Bank Policy and Interest Rates (pg. 22) | |
| Negative Interest Rates (pg. 25) | |
| Historical Interest Rates in the Us (pg. 26) | |
| Structure of Interest Rates (pg. 27) | |
| Closely Watched Interest Rates (pg. 32) | |
| Closely Watched Yield Spreads (pg. 34) | |
| Key Points (pg. 35) | |
| Questions (pg. 37) | |
| Internet Research Discussion Questions (pg. 39) | |
| Part II: Analysis of Fixed-Income Instruments (pg. 41) | |
| 3. Cash Flow of Debt Instruments (pg. 43) | |
| Loans (pg. 44) | |
| Prepayments on Residential Mortgage Loans (pg. 53) | |
| Bonds (pg. 54) | |
| Key Points (pg. 58) | |
| Questions (pg. 59) | |
| Internet Research Discussion Questions (pg. 61) | |
| Solutions to Try it Examples (pg. 62) | |
| 4. Fundamentals of the Valuation of Debt Instruments (pg. 73) | |
| Principles of Debt Valuation (pg. 74) | |
| Valuing a Plain Vanilla Debt Instrument (pg. 75) | |
| Price–Yield Relationship for an Option-Free Bond (pg. 85) | |
| Valuing a Floating-Rate Debt Instrument (pg. 87) | |
| Valuing Bonds with Embedded Options (pg. 87) | |
| Fund Internal Valuation Policy (pg. 90) | |
| Key Points (pg. 91) | |
| Questions (pg. 92) | |
| Internet Research Discussion Questions (pg. 95) | |
| Solutions to Try it Examples (pg. 95) | |
| 5. Yield Measures and Total Return (pg. 101) | |
| Computing the Yield or Internal Rate of Return (pg. 102) | |
| Conventional Yield Measures (pg. 105) | |
| Potential Sources of a Bond’S Dollar Return (pg. 112) | |
| Spread Measures (pg. 115) | |
| Total Return (pg. 115) | |
| Key Points (pg. 119) | |
| Questions (pg. 120) | |
| Internet Research Discussion Questions (pg. 122) | |
| Solutions to Try it Examples (pg. 123) | |
| 6. Measuring Interest-Rate Risk (pg. 129) | |
| Review of the Price–Yield Relationship for Option-Free Bonds (pg. 130) | |
| Price-Volatility Characteristics of Option-Free Bonds (pg. 130) | |
| Price Value of a Basis Point as a Measure of Interest-Rate Risk (pg. 133) | |
| Duration as a Measure of Interest-Rate Risk (pg. 134) | |
| Portfolio Duration and Contribution to Portfolio Duration (pg. 141) | |
| Improving the Duration Estimate: Convexity Measure (pg. 143) | |
| Key Points (pg. 144) | |
| Questions (pg. 145) | |
| Internet Research Discussion Questions (pg. 147) | |
| Solutions to Try it Examples (pg. 148) | |
| 7. Analysis of the Yield Curve (pg. 153) | |
| The Treasury Yield Curve (pg. 154) | |
| Spot Rates and Valuation (pg. 156) | |
| Forward Rates (pg. 165) | |
| Determinants of the Shape of the Term Structure (pg. 168) | |
| Key Points (pg. 173) | |
| Questions (pg. 174) | |
| Internet Research Discussion Questions (pg. 176) | |
| Solutions to Try it Examples (pg. 177) | |
| 8. Traditional Credit Analysis (pg. 181) | |
| Traditional Credit Analysis (pg. 182) | |
| Key Points (pg. 193) | |
| Questions (pg. 194) | |
| Internet Research Discussion Questions (pg. 194) | |
| Solutions to Try it Examples (pg. 195) | |
| Part III: Sectors of the Fixed-Income Market (pg. 197) | |
| 9. US Treasury and Agency Debt (pg. 199) | |
| US Treasury Securities (pg. 200) | |
| Stripped Treasury Securities (pg. 203) | |
| Federal Agency Securities (pg. 204) | |
| Key Points (pg. 207) | |
| Questions (pg. 208) | |
| Internet Research Discussion Questions (pg. 209) | |
| 10. US Municipal Securities (pg. 211) | |
| Types and Features of Municipal Securities (pg. 212) | |
| Municipal Variable-Rate Bonds (pg. 216) | |
| Tax Treatment of Tax-Exempt Municipal Bonds (pg. 216) | |
| Yields on Tax-Exempt Municipal Bonds (pg. 218) | |
| Primary and Secondary Municipal Bond Market (pg. 220) | |
| Municipal Bond Indexes (pg. 221) | |
| Key Points (pg. 222) | |
| Questions (pg. 223) | |
| Internet Research Discussion Questions (pg. 224) | |
| 11. Corporate Fixed-Income Instruments (pg. 225) | |
| Seniority of Debt in a Corporation’S Capital Structure (pg. 227) | |
| Bankruptcy and Creditor Rights (pg. 228) | |
| Types of Corporate Debt (pg. 229) | |
| Private Corporate Debt Market (pg. 238) | |
| Preferred Stock (pg. 240) | |
| Key Points (pg. 242) | |
| Questions (pg. 243) | |
| Internet Research Discussion Questions (pg. 244) | |
| 12. Equity-Related Corporate Debt (pg. 245) | |
| Convertible and Exchangeable Bonds (pg. 246) | |
| Corporate Bonds with Equity Warrants (pg. 254) | |
| Equity-Linked Notes (pg. 255) | |
| Key Points (pg. 256) | |
| Questions (pg. 257) | |
| Internet Research Discussion Questions (pg. 259) | |
| 13. Money Market Instruments (pg. 261) | |
| US Treasury Bills (pg. 263) | |
| Agency Short-Term Securities (pg. 265) | |
| Municipal Short-Term Securities (pg. 265) | |
| Repurchase Agreements (pg. 267) | |
| Commercial Paper (pg. 271) | |
| Negotiable Certificates of Deposit and Nonnegotiable Time Deposits (pg. 274) | |
| Banker’S Acceptances (pg. 276) | |
| Funding Agreements (pg. 278) | |
| Money Market Funds (pg. 279) | |
| Key Points (pg. 282) | |
| Questions (pg. 284) | |
| Internet Research Discussion Questions (pg. 285) | |
| 14. Residential Real Estate–Backed Debt Instruments (pg. 287) | |
| Single-Family Residential Mortgage Loans (pg. 289) | |
| Agency Mortgage Pass-Through Securities (pg. 293) | |
| Agency Collateralized Mortgage Obligations (pg. 306) | |
| Agency Stripped Mortgage-Backed Securities (pg. 318) | |
| Nonagency Residential Mortgage-Backed Securities (pg. 319) | |
| Key Points (pg. 322) | |
| Questions (pg. 324) | |
| Internet Research Discussion Questions (pg. 326) | |
| 15. Commercial Mortgage Loans and Commercial Mortgage-Backed Securities (pg. 329) | |
| Commercial Mortgage Loans (pg. 330) | |
| Commercial Mortgage-Backed Securities (pg. 332) | |
| Key Points (pg. 337) | |
| Questions (pg. 338) | |
| Internet Research Discussion Questions (pg. 339) | |
| 16. Asset-Backed Securities (pg. 341) | |
| Creation of an Asset-Backed Security (pg. 342) | |
| Collateral Type and Securitization Structure (pg. 347) | |
| Credit Risks Associated with Investing in Asset-Backed Securities (pg. 348) | |
| Review of Several Major Types of Asset-Backed Securities (pg. 350) | |
| Key Points (pg. 357) | |
| Questions (pg. 357) | |
| Internet Research Discussion Questions (pg. 359) | |
| 17. Non-US Debt Instruments (pg. 361) | |
| Developed, Emerging, and Frontier Capital Markets (pg. 363) | |
| Classification of Global Bond Markets (pg. 363) | |
| Non-Us Bond Issuers and Bond Structures (pg. 364) | |
| Foreign-Exchange Risk (pg. 365) | |
| Bonds Issued by Non-Us Entities (pg. 366) | |
| Non-US Domestic Markets (pg. 368) | |
| Global Bond Indexes (pg. 373) | |
| Key Points (pg. 374) | |
| Questions (pg. 375) | |
| Internet Research Discussion Questions (pg. 376) | |
| 18. Collective Investment Vehicles (pg. 377) | |
| Investing in Collective Investment Vehicles (pg. 378) | |
| Investment Company Shares (pg. 379) | |
| Exchange-Traded Funds (pg. 381) | |
| Hedge Funds (pg. 382) | |
| Real Estate Investment Mortgage Trusts (pg. 384) | |
| Key Points (pg. 385) | |
| Questions (pg. 386) | |
| Internet Research Discussion Questions (pg. 387) | |
| Part IV: Portfolio Management and Strategies (pg. 389) | |
| 19. Overview of Fixed-Income Portfolio Management (pg. 391) | |
| Overview of Fixed-Income Portfolio Management (pg. 392) | |
| Critical Activities in the Portfolio Management Process (pg. 392) | |
| Understanding the Client’S Investment Objectives (pg. 393) | |
| Selecting an Investment Strategy (pg. 394) | |
| Constructing and Rebalancing a Fixed-Income Portfolio (pg. 399) | |
| Measuring and Evaluating Performance (pg. 399) | |
| Key Points (pg. 400) | |
| Questions (pg. 401) | |
| Internet Research Discussion Questions (pg. 402) | |
| 20. Active Fixed-Income Portfolio Strategies (pg. 403) | |
| Interest-Rate Expectations Strategy (pg. 405) | |
| Yield Curve Strategies (pg. 407) | |
| Yield Spread Strategies (pg. 413) | |
| Relative Value Strategies (pg. 417) | |
| Carry Strategies (pg. 417) | |
| Key Points (pg. 418) | |
| Questions (pg. 420) | |
| Internet Research Discussion Questions (pg. 422) | |
| 21. Trading of Debt Instruments (pg. 423) | |
| The Secondary Debt Market and its Regulation (pg. 425) | |
| Processing a Trade (pg. 425) | |
| Market Infrastructure (pg. 426) | |
| Liquidity (pg. 429) | |
| Trading (Transaction) Costs (pg. 432) | |
| Key Points (pg. 434) | |
| Questions (pg. 436) | |
| Internet Research Discussion Questions (pg. 437) | |
| 22. Constructing a Fixed-Income Portfolio (pg. 439) | |
| Tracking Error (pg. 440) | |
| Approaches to Portfolio Construction (pg. 444) | |
| LDI Bond Portfolio Construction (pg. 455) | |
| Key Points (pg. 461) | |
| Questions (pg. 462) | |
| Internet Research Discussion Questions (pg. 464) | |
| 23. Controlling Interest-Rate Risk with Derivatives (pg. 465) | |
| Why Derivatives are Used to Control Risk (pg. 467) | |
| Derivatives and Counterparty Risk (pg. 468) | |
| Interest-Rate Futures and Forward Contracts (pg. 468) | |
| Interest-Rate Swaps (pg. 476) | |
| Interest-Rate Options (pg. 478) | |
| Key Points (pg. 487) | |
| Questions (pg. 489) | |
| Internet Research Discussion Questions (pg. 491) | |
| 24. Controlling Credit Risk with Credit Default Swaps (pg. 493) | |
| Credit Events (pg. 495) | |
| Types of Credit Default Swaps (pg. 495) | |
| Economic Interpretation of a Credit Default Swap and an Index Credit Default Swap (pg. 500) | |
| Using Credit Default Swaps for Controlling Credit Risk (pg. 502) | |
| Key Points (pg. 503) | |
| Questions (pg. 504) | |
| Internet Research Discussion Questions (pg. 506) | |
| 25. Fixed-Income Performance Measurement and Evaluation (pg. 507) | |
| Requirements for a Fixed-Income Performance and Attribution Analysis Process (pg. 508) | |
| Performance Measurement (pg. 509) | |
| Single-Index Performance Evaluation Measures (pg. 515) | |
| Performance Attribution Analysis (pg. 519) | |
| Key Points (pg. 528) | |
| Questions (pg. 530) | |
| Internet Research Discussion Questions (pg. 532) | |
| Appendix A: Analysis of Callable and Putable Bonds (pg. 533) | |
| Interest-Rate Models (pg. 534) | |
| Applying the Binomial Interest Rate Model (pg. 536) | |
| Option-Adjusted Spread (pg. 538) | |
| Duration and Convexity for Callable Bonds (pg. 539) | |
| Key Points (pg. 541) | |
| Questions (pg. 541) | |
| Appendix B: Analysis of Residential Mortgage-Backed Securities (pg. 543) | |
| Path Dependence ProbLem in Valuing Residential Mortgage-Backed Securities (pg. 544) | |
| Using Simulation to Generate Interest-Rate Paths and Cash Flows (pg. 544) | |
| Calculating the PreSent Value for a Scenario Interest-Rate Path (pg. 546) | |
| Determining the Theoretical Value (pg. 547) | |
| Average Life (pg. 548) | |
| Option-Adjusted Spread (pg. 548) | |
| Calculating Effective Duration and Convexity for a Residential Mortgage-Backed Security (pg. 548) | |
| Key Points (pg. 548) | |
| Questions (pg. 549) | |
| Appendix C: Credit Risk Modeling (pg. 551) | |
| Difficulties in Credit Risk Modeling (pg. 552) | |
| Overview of Credit Risk Modeling (pg. 552) | |
| Structural Models (pg. 553) | |
| Reduced-Form Models (pg. 557) | |
| Key Points (pg. 559) | |
| Questions (pg. 560) | |
| Index (pg. 561) | |
Frank J. Fabozzi
Frank J. Fabozzi is Professor of Practice at Johns Hopkins Carey Business School. He has held positions at EDHEC Business School, Yale, Princeton, MIT, NYU, and Carnegie Mellon. He is the author of Entrepreneurial Finance and Accounting for High-Tech Companies and Introduction to Fixed-Income Analysis and Portfolio Management, and coauthor of Bond Markets, Analysis, and Strategies, Tenth Edition and Foundations of Global Financial Markets and Institutions, all published by the MIT Press. His forthcoming coauthored books to be published by MIT Press are The Economics of FinTech and Simulation, Optimization, and Machine Learning for Finance.Francesco A. Fabozzi
Francesco A. Fabozzi is Managing Editor of the Journal of Financial Data Science, coauthor of two books on asset management, and a doctoral student in data science at Stevens Institute of Technology.|
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