the handbook of fixed income securities
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DESCRIPTIONFRANK J. FABOZZI
THE HANDBOOK OFFIXED INCOME
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THE HANDBOOK OFFIXED INCOME
FRANK J. FABOZZI, Ph.D., CFA, CPA
With the assistance ofSTEVEN V. MANN, Ph.D.
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vC O N T E N T S
Preface xxiiiAcknowledgments xxvContributors xxvii
Overview of the Types and Features of Fixed Income Securities 3Frank J. Fabozzi, Michael G. Ferri, and Steven V. Mann
Bonds 3Preferred Stock 15Residential Mortgage-Backed Securities 16Commercial Mortgage-Backed Securities 19Asset-Backed Securities 19Summary 20
Risks Associated with Investing in Fixed Income Securities 21Ravi F. Dattatreya and Frank J. Fabozzi
Market, or Interest-Rate, Risk 22Reinvestment Risk 22Timing, or Call, Risk 23Credit Risk 24Yield-Curve, or Maturity, Risk 25Ination, or Purchasing Power, Risk 26Liquidity Risk 26Exchange-Rate, or Currency, Risk 27Volatility Risk 28
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Political or Legal Risk 28Event Risk 29Sector Risk 29Other Risks 29Summary 29
The Primary and Secondary Bond Markets 31Frank J. Fabozzi and Frank J. Jones
Primary Market 31Secondary Markets 39Summary 51
Bond Market Indexes 53Frank K. Reilly and David J. Wright
Uses of Bond Indexes 53Building and Maintaining a Bond Index 55Description of Alternative Bond Indexes 56Risk/Return Characteristics 61Correlation Relationships 65Summary 70
Bond Pricing, Yield Measures, and Total Return 73Frank J. Fabozzi
Bond Pricing 73Conventional Yield Measures 86Total Return Analysis 97Summary 105
Calculating Investment Returns 107Bruce J. Feibel
Single-Period Rate of Return 108Performance of an Investment: Money-Weighted Returns 119
Performance of the Investment Manager: Time-Weighted Returns 125Multiple-Period Return Calculation 129Summary 133
The Structure of Interest Rates 135Frank J. Fabozzi
The Base Interest Rate 135Risk Premium 135The Term Structure of Interest Rates 139Summary 156
Overview of Forward Rate Analysis 159Antti Ilmanen
Computation of Par, Spot, and Forward Rates 160Main Inuences on the Yield-Curve Shape 163Using Forward Rate Analysis in Yield-Curve Trades 171
Measuring Interest-Rate Risk 183Frank J. Fabozzi, Gerald W. Buetow, Jr., and Robert R. Johnson
The Full-Valuation Approach 184Price Volatility Characteristics of Bonds 188Duration 197Modied Duration versus Effective Duration 203Convexity 210Price Value of a Basis Point 222The Importance of Yield Volatility 225
U.S. Treasury and Agency Securities 229Frank J. Fabozzi and Michael J. Fleming
Treasury Securities 229Agency Securities 242Summary 250
Municipal Bonds 251Sylvan G. Feldstein, Frank J. Fabozzi, Alexander M. Grant, Jr., and Patrick M. Kennedy
Features of Municipal Securities 253Types of Municipal Obligations 255The Commercial Credit Rating of Municipal Bonds 264Municipal Bond Insurance 270Valuation Methods 271Tax Provisions Affecting Municipals 272Yield Relationships within the Municipal Bond Market 276Primary and Secondary Markets 278Bond Indexes 279Ofcial Statement 280Regulation of the Municipal Securities Market 280
Private Money Market Instruments 285Frank J. Fabozzi, Steven V. Mann, and Richard S. Wilson
Commercial Paper 285Bankers Acceptances 289Large-Denomination Negotiable CDs 292Repurchase Agreements 295Federal Funds 301Summary 303
Corporate Bonds 305Frank J. Fabozzi, Steven V. Mann, and Richard S. Wilson
The Corporate Trustee 306Some Bond Fundamentals 307Security for Bonds 312Alternative Mechanisms to Retire Debt before Maturity 320Credit Risk 327Event Risk 330High-Yield Bonds 331Default Rates and Recovery Rates 335
Medium-Term Notes 339Leland E. Crabbe
Background of the MTN Market 340Mechanics of the Market 342The Economics of MTNs and Corporate Bonds 344Structured MTNs 347Euro-MTNs 349
Ination-Linked Bonds 351John B. BrynjolfssonMechanics and Measurement 353Marketplace 361Valuation and Performance Dynamics 364Investors 364Issuers 369Other Issues 371Conclusion 372
Floating-Rate Securities 373Frank J. Fabozzi and Steven V. Mann
General Features of Floaters and Major Product Types 374Call and Put Provisions 376Spread Measures 377Price Volatility Characteristics of Floaters 379Portfolio Strategies 382
Nonconvertible Preferred Stock 385Frank J. Fabozzi and Steven V. Mann
Preferred Stock Issuance 386Preferred Stock Ratings 390Tax Treatment of Dividends 392
International Bond Markets and Instruments 393Christopher B. Steward
The Instruments: Euro, Foreign, and Global 394U.S.-Pay International Bonds 395Foreign-Pay International Bonds 402Conclusion 408
The Eurobond Market 409David Munves
Founding and the Early Years 410The Eurobond Market Post-EMU: The Drivers of Development 415The Corporate Eurobond Market Today 426Beyond High-Grade Euro Corporates: The Other Eurobond Sectors 434The Outlook for the Eurobond Market 439
Emerging Markets Debt 441Jane Sachar Brauer
The Debt Universe 441Emerging Markets Debt Performance History 445Brady Bonds 449Defaults, Exchanges, Restructurings, Workouts, and Litigation 454Derivatives 464Credit-Linked Notes (CLNs) 466Valuation Methods 467Conclusion 469Collateralized Brady Bonds 469Noncollateralized Brady Bonds 470
Stable Value Investments 471John R. Caswell and Karl Tourville
Stable Value Products 472The Evolution of Stable Value 477Stable Value Portfolio Management 480The Future of Stable Value 485
An Overview of Mortgages and the Mortgage Market 487Anand K. Bhattachar