Fixed income securities

Table of content:
Preface

Acknowledgments

About the Authors

1 Time Value of Money

1.1 Introduction

1.2 Nominal and Effective Rates of Interest

1.3 Variables, Terms to be Used and the Corresponding Symbols

1.4 The Concept of Simple Interest

1.5 The Concept of Compound Interest

1.6 Properties of Simple and Compound Interest

1.7 Effective versus Nominal Rates of Interest

1.8 Principle of Equivalency of Interest Rates

1.9 Future Value of Cash Flows

1.10 Present Value of Cash Flows

1.11 The Internal Rate of Return of an Investment

1.12 Annuities

2. An Introduction to Bonds

2.1 Introduction

2.2 The Leverage Effect

2.3 Tax Shield Due to Interest Payments

2.4 Variables Influencing the Bond Price

2.5 Valuation of a Bond

2.6 Price Quotes for Bonds

2.7 Computation of the Bond Price Using Excel

2.8 The Trading Decision

2.9 Government Securities

2.10 Risks Inherent in Bonds

3. Valuation Between Coupon Dates

3.1 Introduction

3.2 Valuation of a Bond between Coupon Dates

3.3 Accrued Interest

3.4 Other Day-Count Conventions

3.5 Using Excel to Compute Dirty Price

3.6 Pricing a Bond in its Last Coupon Period

3.7 Pricing a Zero-Coupon Bond

4 Bond Yields

4.1 Introduction

4.2 Alternative Yield Measures

4.3 The Realized Compound Yield with Taxes

4.4 Computing the YTM with Taxes

4.5 Computing the YTM of Zero-Coupon Bonds

4.6 Yield to Call

5 Interest Rate Sensitivity: Duration and Convexity

5.1 Introduction

5.2 The Genesis of Duration

5.3 Factors Influencing Duration

5.4 Percentage Price Change and The Modified Duration

5.5 The Effective Duration

5.6 Portfolio Duration

5.7 Convexity

5.8 Approximating the Price Change

5.9 Dispersion

5.10 Properties of Convexity

6 The Money Market

6.1 Introduction

6.2 Risk Factors

6.3 Trading

6.4 Dates of Importance in Money Market Transactions

6.5 Discount and Add-On Securities

6.6 Treasury Bills

6.7 Re-Purchase Agreements

6.8 Negotiable CDs

6.9 Commercial Paper

6.10 Bills of Exchange

7. Mortgages and Mortgage-Backed Securities

7.1 Introduction

7.2 Securitization

7.3 Risks in Mortgage Lending

7.4 Other Mortgage Structures

7.5 Single Month Mortality Rate

7.6 Average Life

7.7 Re-financing

7.8 Pass-Throughs

7.9 Collateralized Mortgage Obligations (CMOs)

8. Bonds with Bells and Whistles

8.1 Introduction

8.2 Floating-Rate Bonds

8.3 Callable Bonds

8.4 Interest Rate Evolution

8.5 Convertible Bonds

Chapter Summary

Multiple Choice Questions

Solutions to Multiple Choice Questions

Exercises

Solutions

Multiple Choice Question Bank

Solutions to Multiple Choice Question Bank
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The book deals exhaustively with pricing and risk management issues pertaining to fixed income products. At the appropriate points, extensive computational problems, wherever possible with the help of Excel, have been clearly demonstrated. To aid beginners, the book commences with a focus on the time value of money, which is a sine qua non for the study of the subject. The book concludes with a study of bonds with embedded options, such as floating rate bonds, callable and putable bonds, and convertible bonds. Interest rate derivatives are not covered in this book, and the readers are advised to study textbooks on financial derivatives, which deal exhaustively with the subject.
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