CONTENTS
Foreword = ⅲ
Preface = ⅴ
Acknowledgments = ⅶ
Web Site Updates = xiv
About the Author = xiv
Note on Rounding Differences = xv
Level Ⅰ = 1
Chapter 1 Features of Fixed Income Securities = 3
Section Ⅰ Introduction = 4
Section Ⅱ Indenture and Covenants = 5
Section Ⅲ Maturity = 5
Section Ⅳ Par Value = 6
Section Ⅴ Coupon Rate = 6
Section Ⅵ Provisions for Paying Off Bonds = 14
Section Ⅶ Conversion Privilege = 20
Section Ⅷ Put Provision = 20
Section Ⅸ Currency Denomination = 20
Section Ⅹ Embedded Options = 20
Section XI Borrowing Funds to Purchase Bonds = 22
Section XII Key Points = 23
End of Chapter Questions = 26
Solutions to End of Chapter Questions = 29
Solutions to Practice Questions = 32
Chapter 2 Risks Associated with Investing in Bonds = 33
Section Ⅰ Introduction = 34
Section Ⅱ Interest Rate Risk = 34
Section Ⅲ Yield Curve Risk = 40
Section Ⅳ Call and Prepayment Risk = 43
Section Ⅴ Reinvestment Risk = 43
Section Ⅵ Credit Risk = 44
Section Ⅶ Liquidity Risk = 47
Section Ⅷ Exchange Rate or Currency Risk = 49
Section Ⅸ Inflation or Purchasing Power Risk = 50
Section Ⅹ Volatility Risk = 50
Section XI Event Risk = 51
Section XII Key Points = 52
End of Chapter Questions = 55
Solutions to End of Chapter Questions = 59
Solutions to Practice Questions = 63
Chapter 3 Overview of Bond Sectors and Instruments = 65
Section Ⅰ Introduction = 66
Section Ⅱ U.S. Treasury Securities = 66
Section Ⅲ Treasury STRIPs = 70
Section Ⅳ Federal Agency Securities = 72
Section Ⅴ Municipal Securities = 80
Section Ⅵ Corporate Debt Instruments = 83
Section Ⅶ Asset-Backed Securities = 91
Section Ⅷ International Bonds = 93
Section Ⅸ Key Points = 97
End of Chapter Questions = 103
Solutions to End of Chapter Questions = 106
Solutions to Practice Questions = 111
Chapter 4 Understanding Yield Spreads = 113
Section Ⅰ Introduction = 114
Section Ⅱ Interest Rate Determination = 114
Section Ⅲ U.S. Treasury Rates = 116
Section Ⅳ Yields on Non-Treasury Securities = 122
Section Ⅴ Non-U.S. Interest Rates = 133
Section Ⅵ Key Points = 135
End of Chapter Questions = 138
Solutions to End of Chapter Questions = 142
Solutions to Practice Questions = 145
Chapter 5 Introduction to the Valuation of Fixed Income Securities = 147
Section Ⅰ Introduction = 148
Section Ⅱ General Principles of Valuation = 148
Section Ⅲ Traditional Approach to Valuation = 162
Section Ⅳ The Arbitrage-Free Valuation Approach = 162
Section Ⅴ Valuation Models = 169
Section Ⅵ Key Points = 170
End of Chapter Questions = 172
Solutions to End of Chapter Questions = 174
Solutions to Practice Questions = 179
Chapter 6 Yield Measures, Spot Rates, and Forward Rates = 185
Section Ⅰ Introduction = 186
Section Ⅱ Sources of Return = 186
Section Ⅲ Traditional Yield Measures = 187
Section Ⅳ Theoretical Spot Rates = 201
Section Ⅴ Forward Rates = 210
Section Ⅵ Key Points = 218
End of Chapter Questions = 221
Solutions to End of Chapter Questions = 227
Solutions to Practice Questions = 239
Chapter 7 Introduction to the Measurement of Interest Rate Risk = 243
Section Ⅰ Introduction = 244
Section Ⅱ The Full Valuation Approach = 244
Section Ⅲ Price Volatility Characteristics of Bonds = 247
Section Ⅳ Duration = 255
Section Ⅴ Convexity = 267
Section Ⅵ Price Value of a Basis Point = 271
Section Ⅶ The Importance of Yield Volatility = 272
Section Ⅷ Key Points = 273
End of Chapter Questions = 277
Solutions to End of Chapter Questions = 281
Solutions to Practice Questions = 287
Level Ⅱ = 289
Chapter 1 The Term Structure and the Volatility of Interest Rates = 291
Section Ⅰ Introduction = 292
Section Ⅱ Historical Look at the Treasury Yield Curve = 292
Section Ⅲ Treasury Returns Resulting from Yield Curve Movements = 295
Section Ⅳ Constructing the Theoretical Spot Rate Curve for Treasuries = 298
Section Ⅴ Theories of the Term Structure Theories = 302
Section Ⅵ Measuring Yield Curve Risk = 309
Section Ⅶ Yield Volatility and Measurement = 312
Section Ⅷ Key Points = 322
End of Chapter Questions = 325
Solutions to End of Chapter Questions = 328
Solutions to Practice Questions = 333
Chapter 2 Valuing Bonds with Embedded Options = 335
Section Ⅰ Introduction = 336
Section Ⅱ Review of How to Value an Option-Free Bond = 338
Section Ⅲ The Binomial Model = 339
Section Ⅳ Valuing and Analyzing a Callable Bond = 347
Section Ⅴ Valuing a Putable Bond = 356
Section Ⅵ Valuing a Step-Up Callable Note = 358
Section Ⅶ Valuing a Capped Floater = 359
Section Ⅷ Analysis of Convertible Bonds = 363
Section Ⅸ Key Points = 370
End of Chapter Questions = 373
Solutions to End of Chapter Questions = 378
Solutions to Practice Questions = 385
Chapter 3 Mortgage-Backed Securities = 389
Section Ⅰ Introduction = 390
Section Ⅱ Mortgages = 390
Section Ⅲ Mortgage Passthrough Securities = 393
Section Ⅳ Collateralized Mortgage Obligations = 406
Section Ⅴ Stripped Mortgage-Backed Securities = 426
Section Ⅵ Nonagency Mortgage-Backed Securities = 428
Section Ⅶ Key Points = 429
End of Chapter Questions = 432
Solutions to End of Chapter Questions = 439
Chapter 4 Asset-Backed Securities = 449
Section Ⅰ Introduction = 450
Section Ⅱ Features of an ABS = 450
Section Ⅲ Home Equity Loans = 457
Section Ⅳ Manufactured Housing-Backed Securities = 461
Section Ⅴ Auto Loan-Backed Securities = 462
Section Ⅵ Student Loan-Backed Securities = 464
Section Ⅶ SBA Loan-Backed Securities = 465
Section Ⅷ Credit Card Receivable-Backed Securities = 466
Section Ⅸ Collateralized Bond Obligations = 468
Section Ⅹ Key Points = 472
End of Chapter Questions = 477
Solutions to End of Chapter Questions = 482
Solutions to Practice Questions = 489
Chapter 5 Valuing Mortgage-Backed and Asset-Backed Securities = 491
Section Ⅰ Introduction = 492
Section Ⅱ Cash Flow Yield Analysis = 492
Section Ⅲ Zero-Volatility Spread = 494
Section Ⅳ Monte Carlo Simulation Model and OAS = 494
Section Ⅴ Measuring Interest Rate Risk = 506
Section Ⅵ Valuing Asset-Backed Securities = 513
Section Ⅶ Valuing Any Security = 514
Section Ⅷ Key Points = 514
End of Chapter Questions = 517
Solutions to End of Chapter Questions = 522
Chapter 6 A Framework for Assessing Trading Strategies = 529
Section Ⅰ Introduction = 530
Section Ⅱ The Principle of Leverage = 530
Section Ⅲ Borrowing Funds via Repurchase Agreements = 533
Section Ⅳ Total Return = 537
Section Ⅴ Controlling for Interest Rate Risk = 543
Section Ⅵ An Illustration = 544
Section Ⅶ Key Points = 547
End of Chapter Questions = 550
Solutions to End of Chapter Questions = 555
Solutions to Practice Questions = 562
Chapter 7 Interest Rate Derivative Instruments = 563
Section Ⅰ Introduction = 564
Section Ⅱ Interest Rate Futures = 564
Section Ⅲ Interest Rate Options = 573
Section Ⅳ Interest Rate Swaps = 578
Section Ⅴ Interest Rate Caps and Floors = 584
Section Ⅵ Key Points = 586
End of Chapter Questions = 589
Solutions to End of Chapter Questions = 593
Solutions to Practice Questions = 599
Chapter 8 Valuation of Interest Rate Derivative Instruments = 601
Section Ⅰ Introduction = 602
Section Ⅱ Interest Rate Futures Contracts = 602
Section Ⅲ Interest Rate Swaps = 608
Section Ⅳ Options = 620
Section Ⅴ Caps and Floors = 632
Section Ⅵ Key Points = 636
End of Chapter Questions = 639
Solutions to End of Chapter Questions = 645
Solutions to Practice Questions = 655
Chapter 9 General Principles of Credit Analysis = 663
Section Ⅰ Introduction = 664
Section Ⅱ Credit Risk and the Need for Credit Analysis = 664
Section Ⅲ Elements of Corporate Credit Analysis = 665
Section Ⅳ Analysis of an Issuer's Character = 665
Section Ⅴ Analysis of the Capacity to Pay = 666
Section Ⅵ Analysis of Collateral = 672
Section Ⅶ Analysis of Covenants = 673
Section Ⅷ Special Considerations for High-Yield Corporate Bonds = 674
Section Ⅸ Credit Analysis of Non-Corporate Bonds = 678
Section Ⅹ Key Points = 689
Appendix Case Study Bergen Brunswig Corporation = 692
Section Ⅰ Background Information = 692
Section Ⅱ Analysis = 692
Section Ⅲ Conclusion = 695
End of Chapter Questions = 697
Solutions to End of Chapter Questions = 701
Index = 707
