PREFACE
This book is designed to provide extensive coverage of the wide range of fixed income products and fixed income portfolio management strategies. Each chapter is written by an authority on the subject.
The eighth edition of the Handbook is divided into ten parts. Part One provides general information about the investment features of fixed income securities, the risks associated with investing in fixed income securities, and background information about fixed income primary and secondary markets. The basics of fixed income analytics—bond pricing, yield measures, spot rates, forward rates, total return, and price volatility measures (duration and convexity)—are also described in Part One.
Parts Two and Three cover the basic characteristics of the instruments traded in the market. Government securities and corporate debt obligations (both bonds and loans) are covered in Part Two. An important addition to the eighth edition is more extensive coverage of leveraged loans and covered bonds, as well as coverage of fixed income exchange traded funds. Part Three focuses on securitized products—mortgage-backed securities and asset-backed securities. The coverage of the nonagency residential mortgage-backed securities and commercial mortgage-backed securities reflects market developments that followed the subprime mortgage crisis in 2007. Unlike the seventh edition, this edition includes separate chapters on planned amortization class bonds, support bonds, accrual (Z) bonds, and stripped mortgage-backed securities.
The focus in Part Four is on the term structure of interest rates, both the use of the information contained in those rates and the modeling of the term structure.
Part Five builds on the analytical framework explained in Part One. In this part, two methodologies for valuing fixed income securities are discussed: the lattice model and the Monte Carlo model. A by-product of these models is the option-adjusted spread. The valuation of convertible bonds is also covered in this part.
The topic of credit risk and its analysis is the subject of Part Six. Traditional methods of credit analysis for corporate bonds and municipal bonds are explained and illustrated. There is also coverage of the various approaches to credit risk modeling.
Multifactor risk models and their applications are explained in Part Seven. The more popular fixed income portfolio management strategies are covered in Part Eight. A framework for classifying the types of bond portfolio strategies is provided in the first chapter in Part Eight, Chapter 49. There is then coverage of quantitative management strategies versus a benchmark, global credit bond portfolio management, high-yield bond portfolio management, international bond portfolio management, and investing in distressed structured credit securities. In addition, there are several specialized chapters related to bond portfolios strategies, such as transition management and financing positions in the bond market, and hedge fund strategies.
Part Nine covers derivative instruments: interest-rate derivatives (futures/forward contracts, options, interest-rate swaps, and caps and floors) and credit derivatives (primarily credit default swaps). The basic feature of each instrument is described as well as how it is valued and used to control the risk of a fixed income portfolio. The basics of credit derivatives are also explained.
Performance evaluation and return attribution analysis are covered in the last three chapters of the Handbook in Part Ten. Coverage includes how these models are built and used, as well as the underlying principles in building these models.
There is one appendix that covers the various methodologies for calculating currency exposures in bond portfolios and the major international bond indexes.
Revisions to the Seventh Edition
The eighth edition is a substantial revision over the seventh edition. The seventh edition had 60 chapters and an appendix. The eighth edition has 71 chapters and one appendix. The following 31 chapters (as well as the appendix) are new:
4 Electronic Trading for the Fixed Income Market
5 Macro-Economic Dynamics and the Corporate Bond Market
10 gency Debt Securities
13 Leveraged Loans
15 Structured Notes and Credit-Linked Notes
21 Fixed Income Exchange Traded Funds
22 Covered Bonds
27 The Effect of Agency CMO PAC Bond Features on Performance
28 Agency CMO Z-Bonds
29 Support Bonds with Schedules in Agency CMO Deals
30 Stripped Mortgage-Backed Securities
31 Nonagency Residential Mortgage-Backed Securities
32 Commercial Mortgage-Backed Securities
34 Securities Backed by Auto Loans and Leases, Equipment Loans and Leases, and Student Loans
35 Collateralized Loan Obligations
38 Empirical Yield-Curve Dynamics and Yield-Curve Exposure
39 Term Structure Modeling with No-Arbitrage Interest Rate Models
46 Introduction to Multifactor Risk Models in Fixed Income and Their Applications
47 Analyzing Risk from Multifactor Fixed Income Models
52 Elements of Managing a High-Yield Bond Portfolio
55 Managing the Spread Risk of Credit Portfolios Using the Duration Times Spread Measure
56 Investing in Distressed Structured Credit Securities
57 Hedge Fund Fixed Income Strategies
63 The Valuation of Interest-Rate Swaps and Swaptions
65 Interest-Rate Caps and Floors
66 Credit Derivatives
67 Credit Derivative Valuation and Risk
68 Hedging Tail Risk
69 Principles of Performance Attribution
70 Performance Attribution for Portfolios of Fixed Income Securities
71 Advanced Topics in Performance Attribution
Moreover, the following seven chapters have been substantially revised:
14 Convertible Securities and Their Investment Application
19 International Bond Markets and Instruments
25 Agency Mortgage-Backed Securities
42 Convertible Securities: Their Structures, Valuation, and Trading
43 Credit Analysis for Corporate Bonds
53 International Bond Portfolio Management
54 Fixed Income Transition Management
When a comprehensive book of this type must be expanded to accommodate the introduction of new products, analytical tools and methodologies, and strategies, some chapters in the prior edition had to be removed due to real “binding” constraints—there are physical limitations on the number of pages that can be bound. Deleted from the revised handbook are chapters on dedicated portfolio strategies (immunization and cash-flow matching) and collateralized debt obligations (cash and synthetic). The former topic, although an important one, involves bond portfolio strategies wherein a manager seeks to lock in prevailing interest rates. In the low interest-rate environment as of this writing, few institutions appear to be pursuing such strategies. As for collateral debt obligations, although there are securities of this type outstanding, there is basically no new issuance except for collateralized loan obligations (a chapter on this product is included in the eighth edition).
Frank J. Fabozzi, PH.D., CFA, CPA
Editor