Fixed Income Analysis, Fourth Edition

CFA Institute's essential guide to fixed-income portfolio management, revised and updatedNow in its fourth edition, Fixed Income Analysis offers authoritative and up-to-date coverage of how successful investment professionals analyze and manage fixed-income portfolios.With contributions from a team of financial experts, the text is filled with detailed information from CFA Institute and contains a comprehensive review of the essential topics in the field. Fixed Income Analysis introduces the fundamental concepts of fixed-income securities and markets and provides in-depth coverage of fixed-income security valuation and portfolio management. The book contains a general framework for valuation that is designed to be accessible to both professionals and those new to the field. The fourth edition provides updated coverage of fixed-income portfolio management including detailed coverage of liability-driven and index-based strategies, the major types of yield curve strategies, and approaches to implementing active credit strategies.The authors include examples that help build the knowledge and skills needed to effectively manage fixed-income portfolios. Fixed Income Analysis gives a real-world understanding of how the concepts discussed are practically applied in client-based scenarios.Investment analysts, portfolio managers, individual and institutional investors and their advisors, and anyone with an interest in fixed-income markets will appreciate this accessible guide to fixed-income analysis.

List of contents

Preface xvAcknowledgments xviiAbout the CFA Institute Series xixPart I Fixed Income EssentialsChapter 1 Fixed-Income Securities: Defining Elements 3Learning Outcomes 31. Introduction 32. Overview of a Fixed-Income Security 42.1. Basic Features of a Bond 52.2. Yield Measures 103. Legal, Regulatory, and Tax Considerations 103.1. Bond Indenture 103.2. Legal and Regulatory Considerations 183.3. Tax Considerations 214. Structure of a Bond's Cash Flows 234.1. Principal Repayment Structures 234.2. Coupon Payment Structures 285. Bonds with Contingency Provisions 345.1. Callable Bonds 345.2. Putable Bonds 365.3. Convertible Bonds 376. Summary 40Practice Problems 42Chapter 2 Fixed-Income Markets: Issuance, Trading, and Funding 47Learning Outcomes 471. Introduction 472. Overview of Global Fixed-Income Markets 482.1. Classification of Fixed-Income Markets 482.2. Fixed-Income Indexes 552.3. Investors in Fixed-Income Securities 563. Primary and Secondary Bond Markets 573.1. Primary Bond Markets 583.2. Secondary Bond Markets 624. Sovereign Bonds 654.1. Characteristics of Sovereign Bonds 654.2. Credit Quality of Sovereign Bonds 664.3. Types of Sovereign Bonds 665. Non-Sovereign Government, Quasi-Government, and Supranational Bonds 685.1. Non-Sovereign Bonds 685.2. Quasi-Government Bonds 695.3. Supranational Bonds 696. Corporate Debt 706.1. Bank Loans and Syndicated Loans 716.2. Commercial Paper 716.3. Corporate Notes and Bonds 747. Structured Financial Instruments 797.1. Capital Protected Instruments 797.2. Yield Enhancement Instruments 797.3. Participation Instruments 807.4. Leveraged Instruments 808. Short-Term Funding Alternatives Available to Banks 828.1. Retail Deposits 828.2. Short-Term Wholesale Funds 828.3. Repurchase and Reverse Repurchase Agreements 849. Summary 87Practice Problems 89Chapter 3 Introduction to Fixed-Income Valuation 93Learning Outcomes 931. Introduction 932. Bond Prices and the Time Value of Money 942.1. Bond Pricing with a Market Discount Rate 942.2. Yield-to-Maturity 982.3. Relationships between the Bond Price and Bond Characteristics 1002.4. Pricing Bonds with Spot Rates 1043. Prices and Yields: Conventions for Quotes and Calculations 1073.1. Flat Price, Accrued Interest, and the Full Price 1073.2. Matrix Pricing 1113.3. Annual Yields for Varying Compounding Periods in the Year 1143.4. Yield Measures for Fixed-Rate Bonds 1183.5. Yield Measures for Floating-Rate Notes 1213.6. Yield Measures for Money Market Instruments 1254. The Maturity Structure of Interest Rates 1305. Yield Spreads 1385.1. Yield Spreads over Benchmark Rates 1385.2. Yield Spreads over the Benchmark Yield Curve 1406. Summary 143Practice Problems 145Chapter 4 Introduction to Asset-Backed Securities 153Learning Outcomes 1531. Introduction 1532. Benefits of Securitization for Economies and Financial Markets 1543. How Securitization Works 1553.1. An Example of a Securitization 1563.2. Parties to a Securitization and Their Roles 1573.3. Structure of a Securitization 1593.4. Key Role of the Special Purpose Entity 1614. Residential Mortgage Loans 1644.1. Maturity 1654.2. Interest Rate Determination 1654.3. Amortization Schedule 1664.4. Prepayment Options and Prepayment Penalties 1674.5. Rights of the Lender in a Foreclosure 1675. Residential Mortgage-Backed Securities 1695.1. Mortgage Pass-Through Securities 1705.2. Collateralized Mortgage Obligations 1755.3. Non-agency Residential Mortgage-Backed Securities 1826. Commercial Mortgage-Backed Securities 1826.1. Credit Risk 1836.2. CMBS Structure 1837. Non-Mortgage Asset-Backed Securities 1877.1. Auto Loan ABS 1877.2. Credit Card Receivable ABS 1908. Collateralized Debt Obligations 1918.1. CDO Structure 1928.2. An Example of a CDO Transaction 1929. Summary 195Practice Problems 197Chapter 5 Understanding Fixed Income Risk and Return 203Learning Outcomes 2031. Introduction 2042. Sources of Return 2043. Interest Rate Risk on Fixed-Rate Bonds 2123.1. Macaulay, Modified, and Approximate Duration 2123.2. Effective Duration 2203.3. Key Rate Duration 2243.4. Properties of Bond Duration 2243.5. Duration of a Bond Portfolio 2303.6. Money Duration of a Bond and the Price Value of a Basis Point 2333.7. Bond Convexity 2354. Interest Rate Risk and the Investment Horizon 2454.1. Yield Volatility 2454.2. Investment Horizon, Macaulay Duration, and Interest Rate Risk 2475. Credit and Liquidity Risk 2516. Summary 252Practice Problems 255Chapter 6 Fundamentals of Credit Analysis 261Learning Outcomes 2611. Introduction 2612. Credit Risk 2623. Capital Structure, Seniority Ranking, and Recovery Rates 2643.1. Capital Structure 2643.2. Seniority Ranking 2653.3. Recovery Rates 2674. Rating Agencies, Credit Ratings, and Their Role in the Debt Markets 2704.1. Credit Ratings 2714.2. Issuer vs. Issue Ratings 2734.3. Risks in Relying on Agency Ratings 2745. Traditional Credit Analysis: Corporate Debt Securities 2795.1. Credit Analysis vs. Equity Analysis: Similarities and Differences 2805.2. The Four Cs of Credit Analysis: A Useful Framework 2806. Credit Risk vs. Return: Yields and Spreads 2987. Special Considerations of High-Yield, Sovereign, and Non-Sovereign Credit Analysis 3077.1. High Yield 3077.2. Sovereign Debt 3157.3. Non-Sovereign Government Debt 3198. Summary 321Practice Problems 324Part II Fixed Income Term Structure, Advanced Valuation and Credit AnalysisChapter 7 The Term Structure and Interest Rate Dynamics 335Learning Outcomes 3351. Introduction 3362. Spot Rates and Forward Rates 3362.1. The Forward Rate Model 3382.2. Yield to Maturity in Relation to Spot Rates and Expected and Realized Returns on Bonds 3462.3. Yield Curve Movement and the Forward Curve 3492.4. Active Bond Portfolio Management 3513. The Swap Rate Curve 3553.1. The Swap Rate Curve 3553.2. Why Do Market Participants Use Swap Rates When Valuing Bonds? 3563.3. How Do Market Participants Use the Swap Curve in Valuation? 3573.4. The Swap Spread 3603.5. Spreads as a Price Quotation Convention 3624. Traditional Theories of the Term Structure of Interest Rates 3644.1. Local Expectations Theory 3644.2. Liquidity Preference Theory 3654.3. Segmented Markets Theory 3664.4. Preferred Habitat Theory 3665. Modern Term Structure Models 3695.1. Equilibrium Term Structure Models 3695.2. Arbitrage-Free Models: The Ho-Lee Model 3746. Yield Curve Factor Models 3776.1. A Bond's Exposure to Yield Curve Movement 3776.2. Factors Affecting the Shape of the Yield Curve 3786.3. The Maturity Structure of Yield Curve Volatilities 3826.4. Managing Yield Curve Risks 3837. Summary 386References 387Practice Problems 387Chapter 8 The Arbitrage-Free Valuation Framework 397Learning Outcomes 3971. Introduction 3972. The Meaning of Arbitrage-Free Valuation 3982.1. The Law of One Price 3992.2. Arbitrage Opportunity 3992.3. Implications of Arbitrage-Free Valuation for Fixed-Income Securities 4003. Interest Rate Trees and Arbitrage-Free Valuation 4013.1. The Binomial Interest Rate Tree 4033.2. What Is Volatility and How Is It Estimated? 4073.3. Determining the Value of a Bond at a Node 4083.4. Constructing the Binomial Interest Rate Tree 4103.5. Valuing an Option-Free Bond with the Tree 4173.6. Pathwise Valuation 4194. Monte Carlo Method 4235. Summary 425Practice Problems 426Chapter 9 Valuation and Analysis of Bonds with Embedded Options 435Learning Outcomes 4351. Introduction 4362. Overview of Embedded Options 4362.1. Simple Embedded Options 4372.2. Complex Embedded Options 4383. Valuation and Analysis of Callable and Putable Bonds 4413.1. Relationships between the Values of a Callable or Putable Bond, Straight Bond, and Embedded Option 4413.2. Valuation of Default-Free and Option-Free Bonds: A Refresher 4423.3. Valuation of Default-Free Callable and Putable Bonds in the Absence of Interest Rate Volatility 4433.4. Effect of Interest Rate Volatility on the Value of Callable and Putable Bonds 4463.5. Valuation of Default-Free Callable and Putable Bonds in the Presence of Interest Rate Volatility 4513.6. Valuation of Risky Callable and Putable Bonds 4594. Interest Rate Risk of Bonds with Embedded Options 4654.1. Duration 4654.2. Effective Convexity 4725. Valuation and Analysis of Capped and Floored Floating-Rate Bonds 4755.1. Valuation of a Capped Floater 4755.2. Valuation of a Floored Floater 4786. Valuation and Analysis of Convertible Bonds 4806.1. Defining Features of a Convertible Bond 4816.2. Analysis of a Convertible Bond 4836.3. Valuation of a Convertible Bond 4876.4. Comparison of the Risk-Return Characteristics of a Convertible Bond, the Straight Bond, and the Underlying Common Stock 4887. Bond Analytics 4928. Summary 493References 495Practice Problems 495Chapter 10 Credit Analysis Models 507Learning Outcomes 5071. Introduction 5072. Modeling Credit Risk and the Credit Valuation Adjustment 5083. Credit Scores and Credit Ratings 5174. Structural and Reduced-Form Credit Models 5225. Valuing Risky Bonds in an Arbitrage-Free Framework 5266. Interpreting Changes in Credit Spreads 5427. The Term Structure of Credit Spreads 5488. Credit Analysis for Securitized Debt 5549. Summary 558References 559Practice Problems 560Chapter 11 Credit Default Swaps 569Learning Outcomes 5691. Introduction 5692. Basic Definitions and Concepts 5702.1. Types of CDS 5712.2. Important Features of CDS Markets and Instruments 5722.3. Credit and Succession Events 5742.4. Settlement Protocols 5752.5. CDS Index Products 5772.6. Market Characteristics 5783. Basics of Valuation and Pricing 5803.1. Basic Pricing Concepts 5813.2. The Credit Curve 5843.3. CDS Pricing Conventions 5853.4. Valuation Changes in CDS during Their Lives 5873.5. Monetizing Gains and Losses 5884. Applications of CDS 5894.1. Managing Credit Exposures 5904.2. Valuation Differences and Basis Trading 5945. Summary 596Practice Problems 597Part III Fixed Income Portfolio ManagementChapter 12 Overview of Fixed-Income Portfolio Management 605Learning Outcomes 6051. Introduction 6052. Roles of Fixed-Income Securities in Portfolios 6062.1. Diversification Benefits 6062.2. Benefits of Regular Cash Flows 6082.3. Inflation Hedging Potential 6093. Fixed-Income Mandates 6113.1. Liability-Based Mandates 6113.2. Total Return Mandates 6154. Bond Market Liquidity 6194.1. Liquidity among Bond Market Sub-Sectors 6204.2. The Effects of Liquidity on Fixed-Income Portfolio Management 6215. A Model for Fixed-Income Returns 6225.1. Decomposing Expected Returns 6235.2. Estimation of the Inputs 6265.3. Limitations of the Expected Return Decomposition 6276. Leverage 6286.1. Using Leverage 6286.2. Methods for Leveraging Fixed-Income Portfolios 6296.3. Risks of Leverage 6327. Fixed-Income Portfolio Taxation 6327.1. Principles of Fixed-Income Taxation 6337.2. Investment Vehicles and Taxes 6348. Summary 636References 637Practice Problems 638Chapter 13 Liability-Driven and Index-Based Strategies 643Learning Outcomes 6431. Introduction 6432. Liability-Driven Investing 6443. Interest Rate Immunization--Managing the Interest Rate Risk of a Single Liability 6484. Interest Rate Immunization--Managing the Interest Rate Risk of Multiple Liabilities 6604.1. Cash Flow Matching 6614.2. Duration Matching 6644.3. Derivatives Overlay 6704.4. Contingent Immunization 6745. Liability-Driven Investing--An Example of a Defined Benefit Pension Plan 6756. Risks in Liability-Driven Investing 6857. Bond Indexes and the Challenges of Matching a Fixed-Income Portfolio to an Index 6898. Alternative Methods for Establishing Passive Bond Market Exposure 6959. Benchmark Selection 70110. Laddered Bond Portfolios 70411. Summary 708References 711Practice Problems 712Chapter 14 Yield Curve Strategies 721Learning Outcomes 7211. Introduction 7212. Foundational Concepts for Active Management of Yield Curve Strategies 7222.1. A Review of Yield Curve Dynamics 7242.2. Duration and Convexity 7273. Major Types of Yield Curve Strategies 7293.1. Strategies under Assumptions of a Stable Yield Curve 7303.2. Strategies for Changes in Market Level, Slope, or Curvature 7374. Formulating a Portfolio Positioning Strategy Given a Market View 7474.1. Duration Positioning in Anticipation of a Parallel Upward Shift in the Yield Curve 7484.2. Portfolio Positioning in Anticipation of a Change in Interest Rates, Direction Uncertain 7514.3. Performance of Duration-Neutral Bullets, Barbells, and Butterflies Given a Change in the Yield Curve 7524.4. Using Options 7655. Inter-Market Curve Strategies 7706. Comparing the Performance of Various Duration-Neutral Portfolios in Multiple Curve Environments 7846.1. The Baseline Portfolio 7846.2. The Yield Curve Scenarios 7856.3. Extreme Barbell vs. Laddered Portfolio 7876.4. Extreme Bullet 7886.5. A Less Extreme Barbell Portfolio vs. Laddered Portfolio 7896.6. Comparing the Extreme and Less Extreme Barbell Portfolios 7907. A Framework for Evaluating Yield Curve Trades 7938. Summary 802Practice Problems 804Chapter 15 Fixed-Income Active Management: Credit Strategies 817Learning Outcomes 8171. Introduction 8172. Investment-Grade and High-Yield Corporate Bond Portfolios 8182.1. Credit Risk 8192.2. Credit Migration Risk and Spread Risk 8202.3. Interest Rate Risk 8212.4. Liquidity and Trading 8243. Credit Spreads 8263.1. Credit Spread Measures 8263.2. Excess Return 8314. Credit Strategy Approaches 8324.1. The Bottom-Up Approach 8324.2. The Top-Down Approach 8424.3. Comparing the Bottom-Up and Top-Down Approaches 8504.4. ESG Considerations in Credit Portfolio Management 8515. Liquidity Risk and Tail Risk in Credit Portfolios 8535.1. Liquidity Risk 8535.2. Tail Risk 8576. International Credit Portfolios 8596.1. Relative Value in International Credit Portfolios 8606.2. Emerging Markets Credit 8616.3. Global Liquidity Considerations 8626.4. Currency Risk in Global Credit Portfolios 8626.5. Legal Risk 8637. Structured Financial Instruments 8637.1. Mortgage-Backed Securities 8647.2. Asset-Backed Securities 8657.3. Collateralized Debt Obligations 8657.4. Covered Bonds 8678. Summary 867References 869Practice Problems 869Glossary 875About the Editors 891About the CFA Program 893Index 895

About the author

Barbara S. Petitt is Director, Curriculum Projects, EMEA, in the Education Division at CFA Institute.

Summary

CFA Institute's essential guide to fixed-income portfolio management, revised and updated

Now in its fourth edition, Fixed Income Analysis offers authoritative and up-to-date coverage of how successful investment professionals analyze and manage fixed-income portfolios.

With contributions from a team of financial experts, the text is filled with detailed information from CFA Institute and contains a comprehensive review of the essential topics in the field. Fixed Income Analysis introduces the fundamental concepts of fixed-income securities and markets and provides in-depth coverage of fixed-income security valuation and portfolio management. The book contains a general framework for valuation that is designed to be accessible to both professionals and those new to the field. The fourth edition provides updated coverage of fixed-income portfolio management including detailed coverage of liability-driven and index-based strategies, the major types of yield curve strategies, and approaches to implementing active credit strategies.

The authors include examples that help build the knowledge and skills needed to effectively manage fixed-income portfolios. Fixed Income Analysis gives a real-world understanding of how the concepts discussed are practically applied in client-based scenarios.

Investment analysts, portfolio managers, individual and institutional investors and their advisors, and anyone with an interest in fixed-income markets will appreciate this accessible guide to fixed-income analysis.

Product details

• Authors: Barbara S. Petitt, Bs Petitt
• Publisher: Wiley, John and Sons Ltd
• Languages: English
• Product format: Hardback
• Released: 31.10.2019
• EAN: 9781119627289
• ISBN: 978-1-119-62728-9
• No. of pages: 944
• Series: CFA Institute Investment Series; The CFA Institute Series; Cfa Institute Investment
• Subjects: Social sciences, law, business > Business > Business administration; Kapitalanlage, Finanzwesen, Finance & Investments, Finanz- u. Anlagewesen, Kapitalanlagen u. Wertpapiere, Investments & Securities