INDEX
ABS. See Asset-backed securities
Absolute return, 1059
Acceptance financing, 340
Accreting swaps, 1471
bond pricing and, 100–101
definition of, 1743
Accrued interest factor, 1743
Active ETFs, 447
Additional-bonds test, 999–1000, 1020
Adjustable rate, 353
Adjustable-rate mortgages (ARMs)
fixed vs. floating coupons for, 663
negative amortization with, 656–657
payment calculations for, 492
teaser rates of, 511
Adjustable-rate preferred stock (ARPS), 477
Adjusted net assets, 1743
Adjusted simple margin, 357
Adjusted total margin, 357
Adjusted tracking, 1145–1147
AFC. See Available funds cap
After-acquired clause, 265
Agency CMOs
cash flow analysis of, 560
hedging, 560
investor goals and constraints with, 559–560
nonagency CMOs vs., 558–559
OAS analysis for, 560
Agency MBS
definition of, 509
prepayment risk with, 1092–1093
underweight in, 1071–1072
Agency pool programs, 515–518
Agency RMBS, 16–17
Agency securities
credit quality of, 208–211
government backing misconceptions with, 208
investors in, 210–211
issuance of, 215–216
issuing agencies for, 217–218
longer-dated, 211–212
market overview for, 208–211
MTNs offered by, 212
in primary market, 214–215
risk of, 207
in secondary market, 215
short-dated, 211
types of, 211–214
Aggregate demand sectors, 70–72
Airport revenue bonds, 230, 1007–1008
Albota, George L., 1525
ALM. See Asset-liability management
Alpha strategies, 1406–1408
Alternative A loans (Alt-A), 488, 1597–1598
Alternative minimum taxable income (AMTI), 247–248
Amend-and-extend amendments, 290–291
Amortizing swaps, 1471
AMTI. See Alternative minimum taxable income
Annualizing procedure, for yield-to-maturity, 107–108
Antczak, Stephen J., 289, 1593
API. See Application program interface
Application program interface (API), 59–61
Appraisal Reduction Amount (ARA), 698, 700
APs. See Authorized participants
ARA. See Appraisal Reduction Amount
Arbitrage interpretation, of forward rates, 792–793
Arbitrage model, for futures contracts, 1398–1401
Arbitrage-free total return, 115
Arbitrageurs, convertible, 310–311
Argentina
default characteristics of, 413, 425–427
distressed debt exchange failures of, 423
ARMs. See Adjustable-rate mortgages
ARPS. See Adjustable-rate preferred stock
Arrangers, 290
Asset allocation
for buy-and-hold investors, 1179–1180
with Fully Analytical Model, 1702–1703
futures contracts and, 1405
in performance attribution, 1640–1642
single-level, 1685
with Total Return Model, 1684–1688
two-level, 1685–1688
U.S. dollar breakdown for, 1660
Asset sale covenant, 974, 1223
Asset swaps, convertible securities and, 943–944
Asset-backed credit strategy, 1343–1344
Asset-backed securities (ABS), 17–18, 646, 1183. See also Auto sector ABS; Credit card ABS
CDO and CDS with, 649–650
credit analysis of, 729–730
credit enhancement for, 728–729
equipment loans and leases as, 732–733
market history of, 727
PAUG structure of, 649
student loans as, 733–736
Asset-liability management (ALM), 377–378
Asset-liability mismatches, in covered bonds, 466–468
Assets, core-plus, 1153
Asset-swapped indexes, 1155–1156
Asvanunt, Attakrtit, 1635
At-the-money option, 1505–1506, 1530–1532
Auction systems, 59
CDS process for, 1560–1562
Auction-rate preferred stock, 477–478
Authorized participants (APs), 449
Auto loans, 730–732
Auto sector ABS
issuers in, 730
structure of, 730–732
Available funds cap (AFC), 667–668
Average life
of MBS, 882
for OAS, 891
volatility, 627–628
B of A-ML. See Bank of America-Merrill Lynch
BABS. See Build America Bond program
Backshall, Tim, 1025
Backward induction, 533
Backwardation, 1480
Balanced convertibles, 923
Balloon date, 484
Balloon loan, 510
Bank of America-Merrill Lynch (B of A-ML)
global government bond index, 37, 40, 41–42
investment-grade bond index, 37
Bankers acceptances
creation of, 341–342
credit risk of, 342
definition of, 340
rates for, 342
Bank-qualified issues, 248
Banks, as CMO investors, 564
BANs. See Bond anticipation notes
Barclays Capital (BC)
Aggregate Bond Index, 1124, 1128–1129, 1130–1131, 1135–1136, 1145–1148, 1152, 1176–1177
Corporate Index, 1159, 1161, 1171–1172, 1292–1293, 1295, 1299, 1306–1308
currency exposure main formula for, 1755–1757
Global Aggregate Index, 1173–1174, 1251, 1259
Global G4 Treasury Index, 1719
Global Government Bond Index, 37, 40
Global Risk Model, 1053, 1077–1078
High-Yield Bond Index, 37, 39, 41, 1295
HPA, 1636, 1645–1647, 1672, 1695
Investment-Grade Bond Index, 37
Investment-Grade Credit Index, 1310
MBS Index, 1171
1–5 Year Corporate Index vs. 1–5 Year Treasury Index, 1143
ORBS, 1179
performance attribution system of, 1168
swap index, 1160–1161
terms, 1757–1759
U.S. Aggregate index of, 1059–1060, 1070
Barclay’s Capital Global Inflation-Linked Bond Index, 382
Barclays Capital Municipal Bond Index, 253–254
Barra Equity Risk models, 1035
Base currency of portfolio, 1744
Base interest rate, 169
Basis
CDS, 1573
CDX, 1591
of derivative contracts, 1729
hedging and, 1420–1421
price, 253
Basis point, price value of, 164–165, 1410
hedging and, 1421
Basis swaps, 1471–1472
valuation of, 1495–1497
Basis trades
cash-CDS, 1349
secondary trade rationales and, 1198
BC. See Barclays Capital
BDT. See Black-Derman-Toy binomial lattice model; Black-Derman-Toy interest rate model
Beacon D.C. & Seattle Pool loan, 691
Bear spread, 1518
Bear Stearns, 1610–1612
counterparty risk of, 1630–1631
Bearer bonds, 5
Belbase, Eknath, 509
Ben Dor, Arik, 1291
Benchmark Bill program, 211
Benchmark index duration, 149
Benchmark interest rate, 169
Benchmark Notes program, 211, 214
Benchmark rate, 477
Benchmark replication
with derivatives, 1172–1174
quantitative approaches to, 1168–1169
stratified sampling for, 1169–1171
tracking-error minimization for, 1171–1172
Benchmarks
aggregate analytics for, 1072–1073
for asset-swapped indexes, 1155–1156
Barclays Capital Aggregate Bond Index for, 1152
cash flow and, 1153–1155
delta hedging, 1154–1155
diversification issues in, 1157–1162
downgrade-tolerant, 1161–1162
duration and, 1153–1155
importance of, 1151
international bond portfolio selection of, 1250–1251
investing outside, 1153
issuer-capped, 1158–1160
liability-based, 1154
LIBOR as, 1155
performance attribution and, 1167–1168
portfolio analysis and, 1162–1168
portfolio management and, 1072–1077
portfolio risk vs., 1152
selection and customization of, 1152–1157
swap-based, 1160–1161
tracking, 1306
Treasury portfolios and, 1157
Beneficial owner, 1363
Berliner, William S., 483
Bernanke, Ben, 375
Best-efforts deal, 291
Bhansali, Vineer, 1331
Bhattacharya, Anand K., 483
Bhattacharya, Mihir, 899
Bid-ask spreads, for Treasury securities, 202–203
Bifurcation principle, 908
Binomial interest-rate tree, 858–862, 867
Binomial lattice models, 857
BDT, 843–848
Black-Karasinski, 849–850
of forward rates, 831
Ho-Lee, 832–837
KWF, 838–841
Black, Fischer, 829–831, 928, 932, 1026, 1035, 1529
Black-box approach, 1256–1257
Black-Derman-Toy (BDT) binomial lattice model
with inverted term structure, 846–848
with normal term structure, 843–845
Black-Derman-Toy (BDT) interest rate model, 830–831
Black-Derman-Toy no arbitrage binomial model, 156
Black-Karasinski binomial lattice model, 849–850
Black-Karasinski interest rate model, 829–830
Black’s pricing formula, 1529–1530
Blanket mortgage, 265
Bloomberg Financial Markets, 229
Bond anticipation notes (BANs), 236
The Bond Buyer, 252
Bond floor, 307
Bond indentures, 971
types of, 972–974
Bond index portfolios
adjusted tracking for, 1145–1147
call exposure of, 1136–1137
competitive performance with, 1128
consistent relative performance of, 1128–1129
for diversification, 1127–1128
duration contribution of quality and, 1136
duration contribution of sector and, 1135–1136
information ratios for, 1148
issuer exposure and, 1138–1139
KRDs and, 1134–1135
low cost of, 1128
market performance predictability with, 1129
modified duration and, 1134
percentage weight in sector and quality of, 1135
performance attribution and, 1148
rationale for, 1127–1130
risk factors of, 1133–1138
track record of, 1130
Bond indexes
alternative, 36
benchmarks for, 34
correlation relationships for, 45–49
creating and maintaining, 35, 39
geometric mean return vs. standard deviation for global, 44
geometric mean return vs. standard deviation for U.S., 43
global government, 40
judging and comparing, 36
risk/return characteristics of, 40–45
stock market indexes vs., 35
U.S. high-yield, 38–40
U.S. investment-grade, 36–38
uses of, 33–34
Bond Market Association
Master Repurchase Agreement, 1358
PSA model of, 504–505
Bond markets. See also International bond markets; Municipal bond market
growth of, 51–52
issuer types in, 170
Bond portfolio
convexity of, 1107
currency exposure formula for, 1742–1743, 1748–1751
dollar duration and, 1104
duration hedging for, 1105–1106
hedging techniques for, 1114–1118
terms for, 1743–1747
value calculation for, 1104–1105
yield measure for, 110–111
Bond portfolio management
active management and, 1125
core/satellite approach to, 1126–1127
enhanced indexing and, 1124–1125
income risk and, 1131–1133
index selection for, 1130–1133
liability framework risk and, 1133
market-value risk and, 1131
pure bond indexing, 1123–1124
traditional, 1123–1125
Bond pricing, 405–406
accrued interest and, 100–101
cash flow for, 89–90
changes and reasons for, 96–97
compounding and, 99–100
between coupon periods, 98–102
coupon rate and required yield relationship with, 95–96
credit influencing, 405–406
day count and, 98–99
determining, 91–93
required yield determined for, 90–91, 94–95
time impacting, 96–97
volatility of, 35
yield curve for, 173–175
of zero-coupon bonds, 97–98
Bond risk premium (BRP)
historical behavior of, 752
realized, 763
theoretical vs. empirical, 753
Bond swaps, 116–119
Bond trades, 1744
Bond-equivalent yield, 108, 1269–1270
Bonds. See also Corporate bonds; Eurobonds; Eurodollar bonds; General obligation bonds; High-yield bonds; Municipal bonds; Primary market; Revenue bonds; Secondary market
CDS and no-arbitrage strategy with, 1572
CDS relationship with, 1571–1576
coupons and, 5–9
with embedded options, calculating OAS, 873, 875–876
emerging market, 396–397
face value, 5
fixed income ETFs compared to, 441–442
historical average returns of, 752
issue size of, 1221
issuers of, 3–4
long-run expected returns of, 752
loss allocation structure of, 1325–1326
options and, 171
par value, 5
price volatility characteristics of, 128–130, 132–135
price volatility of, with embedded options, 132–135
principal of, 5–9
private, 976
ranking/seniority of, 1221
secured high-yield, 976
time path of, 96
valuation of, with embedded options, 866–871
WAM, 521
yield level impact on, 136
Book accounting based indexes, 1156–1157
BOOKINs, 1156–1157
Books, 1744
Bootstrapping process
CDS calibration by, 1581–1582
theoretical spot-rate curve, 175–179
Borrow costs, 930
Borrow fee, 1363
Bottom-up approach
credit analysis in, 1215–1220
in global credit portfolio management, 1188
for high-yield portfolio management, 1214–1235
steps of, 1215
Brady bonds, 396, 409. See also Distressed debt exchanges
collateralized, 437–438
debt relief options with, 417–418
embedded options and, 436
face value of, 438
IEBs and, 424
in Latin America, 418
noncollateralized, 438
PDI and, 424
retirements and exchanges of, 420–421
valuation of, 420
Brady Plan, 417–419
Brash, Donald T., 380
Brauer, Jane Sachar, 409
Brazil, Dart vs., 431
Break-even
analysis, 1270–1273
forward rate interpretation, 792–793
inflation rate, 370–371
spread movement, 1272–1273
Brennan, Michael J., 932
Bridge financing, LBO and, 282
Brinson model, 1640
Broken loan rate, 1362
Broker-dealers
for electronic trading, 56–57, 63
types of, 66–67
BRP. See Bond risk premium
Brynjolfsson, John B., 365
Buetow, Gerald W., Jr., 123, 825, 1479
Build America Bond program (BABS), 225
Bull spread, 1517
Bulldog market, 399
Bullet bonds, 10
Bullet maturity, 1193
Bullet structures, 1205–1206
Burnout, 528–529
Business risk, in credit analysis, 1217–1218
Busted convertibles, 924
Butterfly shift, 808
Buy hedge, 1414
Buy limit order, 1380
Buy stop order, 1380
Buy-and-hold investors, asset allocation for, 1179–1180
Buy-and-hold strategy, 1200
Buyback program, 198–199
Buy-writes, 1521
Cabana, Mark, 207
CACs. See Collective Action Clauses
Call, 1501
Call date, 108
Call exposure
of bond index portfolios and mortgages, 1136–1137
enhancements, 1145
Call feature. See Call provision
Call money rate, 1362
Call options, 1371
for convertible bonds, 301
profit/loss graph for, 1502
valuation of, 870
Call premium, 10
Call privilege, 5
Call protection, 10
for convertible bond, 13–14
Call provision
advantages of, 270–271
benefit of, 9
fixed-price, 271
convexity of, 158–159
duration of, 158–159
price volatility of, 132–134
price/yield relationship of, 158
valuation of, 866–870
Callable notes
Callable securities
characteristics of, 212–213
GSEs and, 212
Callable structures, 1206
definition of, 1525
hybrid ARMs structures of, 511
on LIBOR, 1390–1392
payoff rate for, 1532
straddle pricing, 1535–1536
swaptions vs., 1535, 1537–1538
trading insights for, 1530–1535
uses for, 1528
volatility and, 1532–1533
Cap rate. See Capitalization rate
Capital structure arbitrage, 918
flexibility of, 1345
portfolio management with, 1344–1346
Capitalization rate (cap rate), 683
Caplets, 1528–1530
calibration of, 1534
Captive finance companies, 961
Case-Shiller HPI, 670–673
Cash and carry trade, 1397
Cash bonds, hedging with options on, 1441–1442
Cash collateral account (CCA), 719–720
Cash equitization, 444
Cash flow
benchmarks and, 1153–1155
bond pricing and, 89–90
defined, 961
high-yield bonds and, 987–988
modified, 435–436
on premium leg, 1587
reinvestment, 1198
uncertainty of, 90
waterfalls, 740–741
Cash rate, 1264
Cash reserve account, 729
Cash settle option, 900
Cash-CDS basis trades, 1349
Cash-out refinance, 525
CCA. See Cash collateral account
CCP. See Central counterparty
CDOs. See Collateralized debt obligations
CDR. See Conditional default rate
CDS. See Credit default swaps
CDs. See Certificates of deposits
CDX. See Credit default swap index
CDX.IG index, 1607–1609
Central bank
interest rates and, 76
macro-economy and, 74–77
Central counterparty (CCP), 1543, 1566
Certificates of deposits (CDs), 75
credit risk of, 344
definition of, 343
issuers of, 344
negotiable, 343
yields on, 344–345
Change of Control covenant, 974, 1223
Charter school bonds, 230–231, 1008
Chartists, 1257
Chicago Mercantile Exchange (CME), 1373, 1376
Ching, Anne, 509
Chooser cap/floor, 1527
Choudhry, Moorad, 1445
CIA. See Collateral invested amount
CIR model. See Cox-Ingersoll-Ross model
Citigroup indexes
Broad Investment Grade Index, 1130
currency exposures formula for, 1751–1753
Global Broad Investment Grade Indexes, 1259
terms for, 1753–1755
Clean price, 101–102
Clean up call option, 462
for CMBS, 700
for nonagency RMBS, 664
Clearing corporation, 1382
CLN. See Credit-linked note
CLOs. See Collateralized loan obligations
CLTV. See Combined LTV
CMBS. See Commercial mortgage-backed securities
CME. See Chicago Mercantile Exchange
CMOs. See Collateralized mortgage obligations
CMP. See Curve-matching portfolio
CMT. See Constant Maturity Treasury
CoCo. See Contingent conversion
COFI. See Eleventh District Cost of Funds Index
Collar strategy, for hedging, 1431
Collars, 355
definition of, 1526–1527
effective, 575–576
PACs and drift of, 577
PACs and impact of, 355–357
PACs and interaction of collateral coupons with, 574–577
support bonds raising, 617
Collateral certificate, 710
Collateral coupon
PACs and impact of, 355–357
PACs and interaction of collars with, 574–577
Collateral invested amount (CIA), 720
Collateral trust bonds, 265–266
Collateralized debt obligations (CDOs), 646
ABS and, 649–650
definition of, 737
squared, 1598
synthetic, 335–336
Collateralized loan obligations (CLOs)
assets and, 737–738
capital structure and, 738
coverage tests for, 740–741
creation purpose of, 739
credit structures of, 739–741
definition of, 737
tranche structure for, 738
Collateralized loans. See also Repurchase agreements
dollar rolls, 1359–1362
margin buying, 1362–1363
securities lending, 1363–1365
types of, 1355
Collateralized mortgage obligations (CMOs), 519. See also Tranches
agency vs. nonagency, 558–559
banks as investors for, 564
deal clean-up calls for, 539
exotic, 558
floating-rate securities and, 551–553
hedge funds as investors for, 565–566
insurance companies as investors for, 564–565
inverse floaters and, 553–555
investor types for, 564–566
liquidity of, 538
market of, 537–538
money managers as investors for, 565
multiple accrual classes of, 606
new issue, 539
objectives and intent of, 613
PAC, 543–546
PACquential bonds and, 548–549
with PACs and Z bonds, 600–603
PAC/support structure for, 894–897
pension funds as investors for, 565
plain-vanilla sequential-pay structure for, 891–894
PO-collateralized, 633
rationale for, 538–539
retail investors in, 566
in secondary market, 539
strip securities, 633
VADM bonds and, 550–551
valuation modeling for, 881, 883–885
yield curve structure for, 570–572
Collective Action Clauses (CACs), 432
College and university revenue bonds, 231
Collins, Bruce M., 1395
Combined LTV (CLTV), 495, 1327
Commercial mortgage-backed securities (CMBS), 17, 1183
Beacon D.C. & Seattle Pool loan, 691
certificate subordination levels and ratings for, 693–694
clean-up call provisions for, 700
collateral pool in, 683–691
conduit transactions with, 681–682
controlling class representative in, 695
credit spread history of, 702
definition of, 681
deterministic modeling for, 703–704e
diversification of loan pool for, 686, 691
fusion transactions with, 682–683
holdbacks with, 685
IO, 698
lending standards for, 684
loan structures and features of, 685–686
LTV for, 684
market development of, 700–701
master servicer in, 694–695
nonagency RMBS compared to, 682
overweight in, 1072
pass-through rates for, 697
payment advancing for, 698, 700
prepayments and, 686
priority of payments for, 697–698
probabilistic modeling for, 701
special servicer in, 695
subordination of, 693–694, 696–697
transaction structure in, 692, 694–695
trustees in, 694
valuation techniques for, 683–684
0/0 framework for, 701
Commercial paper, 236–237
asset-backed, 339
credit-supported, 339
definition of, 337
directly-placed vs. dealer-placed, 339
issuers of, 338–339
maturity of, 338
in secondary market, 339
yields on, 340
Commercial real estate (CRE), 682
Commodity-linked notes, 325
Companion bonds. See Support bonds
Compounding
bond pricing and, 99–100
performance attribution and, 1638–1639
portfolio outperformance and, 1735–1737
Compression cycle, for CDS, 1556–1557
Conditional default rate (CDR), 507, 677–678
Conditional premium cap/floor, 1527
Conditional prepayment rate (CPR), 503–504, 524, 677–678
Conduit transactions, 681–682
Conduits, 17
Conseco Inc., 1552
Consent solicitation, 971
Conservatorship, 515
Constant Maturity Treasury (CMT), 485
index, 511
yield of, 272
Constant-maturity swaps, 1471
Consumer price index (CPI), 6, 1704
TIPS and, 368
Contingent conversion (CoCo), 302–303, 899–900
Contingent payment (CoPa), 302–303
Contingent voting, 475
Continuing care retirement community revenue bonds, 231, 1008
Contraction risk, 24
Controlled accumulation, 713–714
Controlled amortization, 713–714
Conventional loans, 486
Conventional yield, 1269–1270
Convergence, 1416
Conversion option, 939–940
Conversion premium, 922
convertible securities and, 901
Conversion trade, 1508
Conversion value, 901
Convertible arbitrageurs, 310–311
Convertible bond valuation
credit risk in, 305–306
discounting methods for, 305
risk factors for, 306–308
stock price evolution in, 304
Convertible bonds. See also Convertible securities
accessibility of, 313
call options for, 301
call protection for, 13–14
CoCo for, 302–303
CoPa for, 302–303
coupon payments of, 300
debt claim in, 299–300
dividend protection for, 302
equity conversion and, 301, 311–312
mandatory, 300
motivations behind issuance of, 312
net share settlement with, 302
opportunistic issuance of, 314
performance of, 309
primary investors in, 309–312
put options for, 301
return profile for, 303
takeover protection for, 302
tax and accounting benefits of, 313
Convertible debt products
contingent, 908–909
definition of, 904
negative yield, 909
original issue discount, 907
premium redemption, 907
step-up, 907
traditional, 905
zero coupon, 905–906
Convertible market
distressed, 944
evolution in, 903
growth of, 944
segments of, 903–904
Convertible new issues
market growth for, 918–919
Convertible preferred products, 904
capped common, 911–912
dated, 911
definition of, 909–910
modified capped common, 912
modified mandatorily, 913
perpetual maturity, 910–911
step-up, 911
traditional mandatorily, 912–913
Convertible securities. See also Convertible bonds
asset swaps and, 943–944
attributes of, 917
characteristics of, 920
conversion option and, 939–940
conversion ratio of, 901
conversion value of, 901
descriptors of, 928–930
duration risk of, 902
embedded options and, 939–942
essential features of, 899–901
hedge funds and, 943
investing, 915–918
new issues in, 918–920
payback period as key measure for, 925–926
put options and, 940–941
redemption option and, 941–942
stages of, 923–925
structured public, 915
valuation approaches for, 925–935
value diagram for, 920–923
variables of, 931–932
Convertible valuation models
analytic, 932–934
applying, 937–939
credit spread and, 936
descriptors and variables of, 928–935
implied default probability and, 938–939
implied volatility and, 939
interest rate and, 935–936
partial derivatives and, 937–938
stochastic variables in, 928
stock volatility and, 936–937
Convexity, 149, 764. See also Durationconvexity hedging; Effective convexity
of bond portfolio, 1107
of callable bonds, 158–159
definition of, 150
as expected return measure component, 779
flat, 1511
illustrations of, 154–163
long, 1511–1512
modified, 154
OAS and, 890–891
option-adjusted, 677
of option-free bond, 155–157
options and, 1514
percentage price change and, 150–151
profit/loss graph for, 1512
of putable bonds, 159–161
short, 1513
Convexity bias
illustration of, 754
pure expectations theory and, 755
term structure influenced by, 770–772
yield-curve impact of, 754–755
Convexity measure
formula for, 150
scaling, 152–153
Cooper, Ian, 817
CoPa. See Contingent payment
Core/satellite approach, 1126–1127
Corporate asset class. See Credit asset class
Corporate bonds, 5
asset sale redemption for, 275–276
capital structure of, 84–86
covered bonds compared to, 463
credit ratings for, 277–278
credit risk for, 276–279
default rates of, 283–285
definition of, 259
event risk and, 279–281
exposure of, 459
Fitch ratings of, 278
fixed-rate, 262
high-yield, 986–992
interest payment characteristics of, 262–264
by issuer type, 261
macro-economy and, 69
Moody’s Investor’s Service ratings of, 278
municipal bonds compared to, 119–120
recovery rates of, 285
retirement mechanisms for, 270–276
return on equity analysis for, 966
security for, 264–270
sinking-fund provision for, 273–275
stagflation and, 83–84
Standard & Poor’s ratings of, 278
tender offers and, 276
traditional ratio analysis for, 958–966
Treasury securities vs., 1143
yield curve for, 77–79
Corporate debt maturity, 261
Corporate substitution, 1143
Corporate trustees, 260–261
Correlation trading, 1350
Corridors, 1527
Cost of carry, 1400
Counterparties, 1445
Counterparty risk, 1447
for Bear Stearns and Lehman Brothers, 1630–1631
CDS and reduction of, 1543
funded hedges and cost of, 1630–1631
Country risk, 930
Countrywide Alternative Loan Trust (CWALT), 647
Countrywide Asset-Backed Certificates (CWL), 647
Countrywide Home Loan Mortgage Pass-Through Trust (CWHL), 647
Coupon leverage, 355
Coupon makewhole, 905
Coupon payments, 1750–1751
Coupon rate, 5
bond pricing relationship with required yield and, 95–96
of floating rate securities, 7
interest-rate risk and impact of, 131
price volatility and, 8
reinvestment risk and, 105
yield-to-maturity relationship with current yield formula and, 107
Coupon securities, 194
Coupon stripping, 180–181
process of, 204
Coupons, 262
bond pricing between periods of, 98–102
bonds and, 5–9
convertible bonds and, 300
floating-rate securities formula for, 354
municipal bond features with, 227–228
size of, 8
types, 1222
Covariance matrix, 1165
Covenant analysis, 1222–1223
Covenant default, 971
Covenant relief amendments, 290–291
Covenant risk, 1220
Cover assets, 466
Coverage tests, 740–741
Covered bonds, 18
asset-liability mismatches in, 466–468
corporate bonds compared to, 463
definition of, 459
history of, 460
legislative, 463–464
liquidity risk in, 467
rating agencies for, 469
securitization compared to, 469–471
structure of, 461–466
structured, 464–466
understanding, 460–461
Covered calls, 1520
Covered call-writing strategy
with futures options, 1437–1440
for hedging, 1429–1430
Covered interest arbitrage, 1264
Cox-Ingersoll-Ross model (CIR model), 1112
CPI. See Consumer price index
CPI floaters, 382
CPR. See Conditional prepayment rate
Crawford, Alexander, 537
CRE. See Commercial real estate
Creation cost, of fixed income ETFs, 453–454
Credit
ABS analysis with, 729–730
agency securities quality of, 208–211
bond pricing influenced by, 405–406
burnout, 658–659
CLO structures of, 739–741
derivatives, 1735
emerging markets quality of, 411
enhancements, 466
interest rates determined by supply and demand for, 70
mortgages and guarantees of, 486–487
nonagency RMBS and external enhancements with, 669–670
Orange County, California problems with, 239–240
price movements and quality of, 951–952
reporting firms for, 494
Washington Public Power Supply System problems with, 239–240
Credit analysis. See also Industry financial analysis
approaches to, 949–952
for bottom-up approach, 1215–1220
business risk of, 1217–1218
calibration of, 1034–1035, 1039, 1043
comparable, 1228–1230
covenant analysis in, 1222–1223
covenant risk in, 1220
examples of, 1217
of financial indentures, 975, 981–986
financial risk in, 1218
global credit portfolio management and, 1209–1210
of high-yield bonds, 986–992
incomplete-information approach to, 1026, 1040–1044
industry financial analysis for, 958–968
industry variables for, 952–958
information sources for, 1021–1022
key components of, 1216
liquidity risk in, 1225–1227
management/ownership risk in, 1218–1220
municipal bond market and, 996
of municipal bonds, 1004
reduced-form approach to, 1026, 1036–1039
relative value for, 1186–1190, 1227–1235
risk assessment checklist for, 1223–1225
security structure and terms for, 1220–1222
structural approach for, 1026–1036
of utility indentures, 975–981
Credit asset class, 1183
excess returns and, 1184
optimization of, 1185
Credit barbell strategy, 1208
Credit card ABS
amortization period for, 713–715
controlled accumulation in, 713–714
controlled amortization in, 713–714
credit enhancement in, 718–721
early amortization in, 715
floating rate, 723
life cycle of, 712–715
market growth of, 707
ratings agency criteria for, 721–723
revolving period for, 712–713
Credit card master trust
analysis of, 721–723
basic structure of, 708–709
CCA and, 719–720
CIA and, 720
discounting in, 717
finance charge collections and allocations for, 717
group concept for, 716
interchange fee in, 718
IT structure and, 709–711
nonsocialized, 717
principal collections for, 716
recoveries in, 718
socialized, 717
stress test for, 724–725
subordination in, 720–721
Credit card securitization
charge-offs and, 721–722
delinquency rate in, 722
history of, 707–708
investor interest vs. seller interest in, 711–712
IT structure and, 709–711
master trust structure and, 708–709
monthly payment rate for, 723
portfolio yield in, 721–722
purchase rate for, 723
Credit cards
affinity and co-branded programs and, 724–725
general purpose, 724
market growth of, 707–708
private label, 725
teaser rates and, 724
Credit crisis of 2007–2009, 397, 1298–1302
Credit curing, 525
Credit default risk, 277
Credit default swap index (CDX), 1226, 1350
basis, 1591
constituents, 1563–1564
growth of, 1562
inclusion criteria for, 1563
mechanics of, 1564
premium leg of, 1564–1565
protection leg of, 1565
risk management for, 1591
valuation of, 1589–1591
Credit default swaps (CDS), 300, 310–311, 1173–1174
ABS and, 649–650
advantages of, 1544
approximation of, 1588–1589
auction process for, 1560–1562
basis, 1573
basis trades, cash-, 1348–1349
bond relationship with, 1571–1576
bonds no-arbitrage strategy with, 1572
bootstrapping process calibrating, 1581–1582
CLN combined with, 331–332
CLN compared to, 330
compression cycle for, 1556–1557
contracts, new and existing, 1582–1583
convertible securities and, 902, 944
counterparty risk reduction for, 1543
credit events in market of, 1551
definition of, 1546
in emerging markets, 433–434
growth in market of, 1201, 1541–1542
importance of, 1565–1566
issuer-specific risk protection with, 1177
market pricing of, 1575–1576
mechanics of, 1547–1550
par spread and, 1579
premium leg of, 1548–1549, 1576–1578
pricing models needed for, 1570–1571, 1576–1582
protection leg of, 1549–1550, 1578
relative value analysis with trends in, 1234–1235
restructuring triggering, 1559–1560
risk management for, 1583–1589
settlement timeline for, 1554–1556
sovereign market for, 1338–1339
Spread DV01 of, 1584–1587
survival curve interpolation for, 1579–1581
TD in, 1557–1558
upfront payment in, 1550, 1578–1579
uses of, 1545–1546
valuation example for, 1585–1588
valuation of, 1569–1571
valuation of existing, 1574–1575
Credit derivatives
importance of, 1565–1566
market evolution of, 1541–1544
market participants for, 1544–1545
uses of, 1545–1546
Credit events. See also Event risk
in CDS market, 1551
definition of, 1550–1551
deliverables for, 1557–1559
determination of, 1554–1556
hard, 1551
by region, 1553
restructuring, 1551–1553
settlement of, 1554
soft, 1551
Credit rating
for corporate bonds, 277–278
downgrade and upgrade of, 25
migration table for, 277
municipal bonds and commercial, 238–244
municipal bonds and differences in, 249–250
transition table for, 277, 279
Credit risk, 170
of bankers acceptances, 342
calibrating factors of, 1314–1316
of CDs, 344
in convertible bond valuation, 305–306
corporate bonds and, 276–279
definition of, 1025
DTS and, 1088–1091
fixed income multifactor risk modeling and, 1054–1055, 1088–1091
gauging, 24–25
incomplete-information approach to, 1026, 1040–1044
interest-rate swaps and, 1474–1475
leverage risk vs., 1321–1322
models of, 25–26
mortgages and, 506–507
with nonagency RMBS, 663, 677–678
per rating, 1091–1092
portfolio management and, 1088–1091
reduced-form approach to, 1026, 1036–1039
of repurchase agreements, 347–349, 1357–1359
sovereign, 1602–1603
structural approach for, 1026–1036
of structured notes, 325–326
time factor in, 80
Credit scores, 494–495
FICO, 655
models for, 992–994
in classical approach, 1028–1031
CMBS history with, 702e
convertible valuation models and, 936
cyclicality of, 81–83
duration, 307
factors governing, 1191–1193
in first-passage model, 1030
incomplete-information credit model and, 1040–1041
measuring exposure of, 1292–1294
patterns in, 1031
Credit-curve analysis, 1208–1209
Credit-defense trades, 1195–1196
Credit-linked note (CLN)
CDS combined with, 331–332
CDS compared to, 330
characteristics of, 329–331
components of, 434
in emerging markets, 334–335, 434–435
first-to-default, 333–334
investor exposure with, 434–435
popularity of, 316
reference obligation in, 332
SCDOs combined with, 335–336
SPV structure of, 330–331
Credit-sensitive notes, 333
Credit-spread risk, 360
spread duration measuring, 279, 1291–1292
Credit-upside trades, 1195
Critical stock price, 900, 940
Cross-currency FX trades, 1744
Cross-hedging, 1266, 1404, 1414
Crossover buyers, 226
Cumulative preferred stock, 15, 475
Cumulative swap valuation lattice, 1482, 1485
for forward start swaps, 1487
for LIBOR TED swap, 1497
Currency derivatives, 1734
Currency exposures
BC main formula for, 1755–1757
bond portfolio formula for, 1742–1743, 1748–1751
Citigroup indexes formula for, 1751–1753
guiding principles for, 1741–1742
portfolio outperformance from, 1648–1649
Currency management
hedging and, 1265–1266
international bond portfolio and, 1251–1255
proxy hedging and, 1267
unhedged expected return and, 1268–1269
Currency return, 1264
Currency risk, 28
international bonds and, 401–406
Currency-linked notes, 323–324
Current yield formula, 102–103
yield-to-maturity relationship with coupon rate and, 107
Curtailments, 523
Curvature risk, 816
Curvature shifts, 803–804
elusive nature of, 813
treasury bonds and, 810
Curve allocation
global, 1719–1728
to local markets, 1716–1719
Curve carry, 1718
Curve change, 1718
Curve risk
fixed income multifactor risk modeling and, 1053–1054, 1083–1088
portfolio management and, 1083–1088
Curve-matching portfolio (CMP), 1718
Customer repo, 349–350
CWALT. See Countrywide Alternative Loan Trust
CWHL. See Countrywide Home Loan Mortgage Pass-Through Trust
CWL. See Countrywide Asset-Backed Certificates
Da Silva, António Baldaque, 1049, 1069, 1635, 1671, 1711
Dapeng Hu, 645
Dart vs. Brazil, 431
Dattatreya, Ravi F., 21
Davidson, Andrew, 509
Davis, Mark, 1039
DC. See Determinations committee
DCF analysis. See Discounted cash flow analysis
De minimus, rule of, 247
Deal call risk, 563
Dealer options, 1372
Dealer paper, 339
Debenture bonds, 268–269
convertible, 269
exchangeable, 270
subordination of, 269
Debt buyback program, 198–199
Debt covenant, 972
Debt service coverage ratio (DSCR), 684
trigger, 703
Debtor in possession (DIP), 1347
Debt-to-income ratio (DTI), 655–656
Dedicated outright convertible bond funds, 311
Dedicated tax-backed bonds, 235, 1000, 1009
Default
barriers, 1030–1031
correlation, 1038–1039
covenant, 971
dependent, 1031–1033, 1041–1042
equivalent recovery and, 1037
GOs and, 995
GOs and city of Cleveland, 1002
intensity, 1036–1037
municipal bonds and, 996
payment, 971
prepayment and, 525–526
top-down approach and expectations of, 1239
Default probability
estimating, 1025
predefault events and, 1035–1036
Default rate, 26
of corporate bonds, 283–285
Default risk, 170
definition of, 25
gauging, 25–26
mortgages and, 506–507
Deferment period, 10
Deferred coupon structures, 282
Deferred-interest bond (DIB), 264, 282
Delinquencies, mortgages and, 506
Deliverable security, 902
Department of Housing and Urban Development (HUD), 486
Depository Trust and Clearing Corporation (DTCC), 1542
Derivative contracts
basis of, 1729
characteristics of, 1370–1372
credit, 1735
currency, 1734
definition of, 1369
interest rate, 1734–1735
leverage security selection outperformance and, 1730
portfolio returns containing, 1729–1730
returns of, 1728–1729
special handling of certain, 1733–1735
Derivative securities, 237–238
Derman, Emanuel, 830–831
Designated Bonds program, 221
Detachable warrants, 14–15
Determinations committee (DC), 1556
Deterministic modeling, 703–704e
DIB. See Deferred-interest bond
Dim sum bonds, 399
DIP. See Debtor in possession
Direct paper, 339
Directionality, options and, 1514
“Dirt” bonds, 231
Discount coupon loans, 528
Discount margin, 358
drawbacks to, 113
for floating-rate securities, 111–112
Discount notes, 211
Discount points, 513
Discount securities, 194
Discounted cash flow analysis (DCF analysis), 683–684
Discretionary order, 1381
Distressed convertibles, 924–925
Distressed debt exchanges
Argentina failures with, 423
components of, 425
international litigation related to, 429–430
restructuring after, 424–427
successes, 422–423
unsuccessful, 423
Distressed investing strategy, 1347–1348
Distressed residential mortgage investment, 1319
Distressed structured credit securities, 1319
Dividend payable, 1744
Dividend protection, 302
Dividend reset spread, 477
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 256
trust preferred securities in, 478
Dollar bond, 253
Dollar default rate, 284
Dollar duration
bond portfolio and, 1104
hedging and, 1422–1426
principal component, 1110–1111
Dollar rolls
definition of, 1359
financing cost of, 1360–1362
risk and, 1362
Dollar-for-dollar payback, 927
Domestic CDs, 344
Domestic issues, 398
Dorigan, Michael, 857
Double barreled bonds, 230
Double-up option, 476
Downgrade risk, 25–26
Downgrade-tolerant indexes, 1161–1162
DSCR. See Debt service coverage ratio
DTCC. See Depository Trust and Clearing Corporation
DTI. See Debt-to-income ratio
DTS. See Duration times spread
Dual-indexed floaters, 355
Duration, 764. See also Effective duration
benchmark index, 149
benchmarks and, 1153–1155
calculating, 137–138
of callable bonds, 158–159
contribution of quality, 1136
contribution of sector, 1135–1136
as first derivative (mathematical term), 146–147
of floating-rate securities, 360–361
index, 361
inflation, 1057
international bond portfolio managing, 1259
interpretations of, 145–147
long, 1070
Macaulay vs. modified, 144–145
of MBS, 1154
as measure of time, 146–147
measures of, 1410
modified vs. effective, 143–144, 1410
option-adjusted, 144, 534–535, 889–890
of option-free bond, 155–157
percentage price change and, 138–140
portfolio, 147–149
portfolio changing, 1403–1404
portfolio management and exposure of, 1086
price change estimation with, 140–142
of putable bonds, 159–161
PVBP and, 164–165
rate shocks and, 142–143
relative value analysis measuring, 1235
slope, 814–815
target dollar, 1411–1413
TIPS and, 371–373
of yield curve shifts, 819, 821
Duration hedging, 1103
for bond portfolio, 1105–1106
comparative analysis of, 1114–1118
effectiveness of, 1118
hedging errors in, 1117
restrictive assumptions with, 1106
with Taylor expansion, 1104–1107
Duration risk, 23
convertible securities and, 902
Duration times spread (DTS), 1055
advantage of, 1294, 1302, 1315
computing, 1293–1294
credit crisis of 2007-2009 and, 1298–1302
credit risk and, 1088–1091
excess return volatility vs., 1296–1297
hedging and, 1302–1306
index tracking portfolios and, 1306–1310
market-betas predicted with, 1303–1304
for multifactor risk modeling, 1314–1316
portfolio diversification of issuer risk and, 1311–1314
portfolio management with, 1292
restricting limit of, 1313
spread volatility and, 1295–1298
systemic risk factor and, 1088
Duration/convexity approach, to interest-rate risk, 137–149
Duration-convexity hedging, 1107–1108
comparative analysis of, 1114–1118
hedging errors in, 1117
Dym, Steven I., 69
Early redemption features, 1222
ECNs. See Electronic communications networks
Economic downturns, 1596–1597, 1602–1604
funded hedges and, 1625–1629
homebuilder vulnerabilities in, 1626
Economic Stimulus Act of 2008 (ESA), 487
Ecuador
defaulted debt characteristics, 424–425, 427–428
Elliot Associates vs. Peru and, 431
Effective collars, 575–576
Effective convexity, 154, 890–891
interest-rate risk and, 876–878
MBS and, 533–534
percentage price changes and, 161–163
of SMBS, 638–640
Effective date, 1449
Effective duration, 371–373
illustrations of, 154–163
interest-rate risk and, 876–878
MBS and, 533–534
modified duration vs., 143–144, 1410
percentage price changes and, 161–163
of SMBS, 638–640
Effective margin, 357
Eight times rents, 960
El Karoui, Nicole, 1043
Electronic communications networks (ECNs), 53
technology for, 59–61
Electronic fixed income trading
access for, 63–66
aggregation of, 61–62
pricing and, 66–67
technologies for, 59–61
types of, 57–59
Electronic trading
current technologies for, 59–61
of fixed income instruments, 53–54
models, 58–59
of municipal bonds, 63–66
platforms, 57–58
rise of, 52–55
SEC regulatory requirements for, 55–56
web applications for, 63–66
Eleventh District Cost of Funds Index (COFI), 511
Elliot Associates vs. Peru, 431
Embedded fee, 1363
Embedded options, 171
bonds with, calculating OAS, 873, 875–876
Brady bonds and, 436
convertible securities and, 939–942
interest-rate risk and impact of, 131–132
price volatility of bonds with, 132–135
valuation of bonds with, 866–871
bonds, 396–397
CDS in, 433–434
credit quality of, 411
dollar-denominated, 389
high-yield bonds in, 412
intermarket correlations for, 415–416
price volatility in, 415
Sharpe ratio in, 415
valuation in, 435–436
Emerging markets debt. See also Distressed debt exchanges
domestic vs. external, 410
history of, 409
investor base of, 412–413
issuers of, 410–411
performance history of, 413–415
by region, 410
repo markets and, 435
universe of, 409
Empirical volatility, 1522
EMTNs. See Euro Medium Term Notes
EMU. See European Monetary Union
Enhancements, bond portfolios
call exposure, 1145
issue-selection, 1142
lower-cost, 1141–1142
sector/quality, 1143–1145
yield curve, 1142–1143
yield-tilt, 1143
Eonia swaps. See Eurocurrency OIS swaps
Equifax, 494
Equilibrium interest rate models, 825
Equipment loans and leases, 732–733
Equipment trust certificates (ETCs), 267–268
Equity
convertible bonds and conversion of, 301, 311–312
definition, 960
story, 917
substitute convertibles, 923–924
Equity-linked notes, 324–325
Equity-linked volatility arbitrage, 918
Equivalent recovery, 1037
Equivalent taxable yield
for municipal bonds, 245–246
Treasury securities and, 172
ESA. See Economic Stimulus Act of 2008
Escrow fund, pure vs. mixed, 234
Escrow-to-maturity bonds (ETM bonds), 235
ETCs. See Equipment trust certificates
ETFs. See Exchange-traded funds
ETM bonds. See Escrow-to-maturity bonds
Euro Medium Term Notes (EMTNs), 320
market, 395–396
Eurobonds
Eurodollar bonds vs., 399
growth of, 410
market, 5–6
term confusion with, 388
Eurocurrency OIS swaps (Eonia swaps), 1473
Eurodollar bonds
definition of, 391
Eurobonds vs., 399
growth and future of, 391–392
history of, 390
liquidity of, 391
market for, 393–394
marketability of, 391
Yankee bonds vs., 390
Eurodollar CDs, 344
Eurodollar futures
contract, 1377–1378
options on, 1385–1386
European Monetary Union (EMU), 1248
Event risk, 30
corporate bonds and, 279–281
Excess Return Model, 1681–1682
formula for, 1688
portfolio outperformance breakdown with, 1689, 1695
Excess return volatility, DTS vs., 1296–1297
Excess spread. See also Over-collateralized/excess spread
in credit card master trust, 719, 721
as credit enhancement, 729
Exchange rates, 932
closing forward rates, 1744, 1753, 1757
closing spot rates, 1744, 1757
Exchange-rate risk, 28
Exchanges, 58
Exchange-traded funds (ETFs). See also Fixed income ETFs
international bonds and, 400–401
inverse, 446
municipal bond, 226
Ex-coupon date, 1744, 1753–1754, 1758
Execution risk adjustment, for fixed income ETFs, 455–456
Expected return measures
alternative, 778–784
convexity as component of, 779
curves for, 782
decomposing, 777–788
rolling yield as component of, 778–779
sample, 781
yield income as component of, 779
Experian, 494
Expiration date, 1371
Extendible reset bonds, 8, 283
Extension risk, 24
Fabozzi, Frank J., 3, 21, 89, 123, 169, 193, 207, 225, 259, 289, 337, 353, 737, 828–829, 857, 881, 949, 1101, 1247, 1355, 1369, 1395, 1409, 1445, 1480
Factoring securities, 1744–1745
Fair Isaac Corporation (FICO), 221–222
credit scores from, 655
nonagency RMBS scores with, 647
Fannie Mae. See Federal National Mortgage Association
Farm Credit System (FCS), 219–220
Farm Credit System Financial Assistance Corporation, 222
Farmer Mac. See Federal Agricultural Mortgage Corporation
FCF. See Free cash flow
FCS. See Farm Credit System
FDIC. See Federal Deposit Insurance Company
Federal agencies, 207
Federal Agricultural Mortgage Corporation (Farmer Mac), 221
Federal Deposit Insurance Company (FDIC), 217
Federal Family Education Loan Program (FFELP), 733–734
Federal funds futures contracts, 1379
Federal funds market, 350–351
Federal funds rate, 74, 350–351
Federal Home Loan Banks (FHLB), 207
history and operation of, 219–220
Federal Home Loan Mortgage Corporation (Freddie Mac), 207
agency pool programs for, 515–518
debt spreads of, 208–209
Fed purchasing debt obligations of, 210–211
Gold program of, 518
government conservatorship of, 208–211
guarantees of, 514–515
history and operation of, 219, 513–515
pool characteristics disclosures of, 521
Reference Bill program, 211
Reference Notes program, 211, 214
SMBS program of, 632
WAC of pool of, 515–516
WAM of pool of, 516
Federal Housing Administration (FHA), 486, 1013
Federal Housing Finance Agency (FHFA), 209
Federal National Mortgage Association (Fannie Mae), 207, 1423–1426
agency pool programs for, 515–518
Benchmark Bill program, 211
Benchmark Notes program, 211, 214
debt spreads of, 208–209
Fed purchasing debt obligations of, 210–211
government conservatorship of, 208–211
guarantees of, 514–515
history and operation of, 218–219, 513–515
MBS program of, 518
pool characteristics disclosures of, 521
spread analysis for, 532
Federal Open Market Committee (FOMC), 200
Federal Reserve (Fed). See also Central bank
Fannie Mae and Freddie Mac debt obligations purchased by, 210–211
federal funds market and, 350–351
liquidity and, 74–75
maintenance margin requirement of, 1362–1363
repo market and, 349–350
in secondary market, 200–201
top-down approach and policy of, 1236–1237
Federal Reserve Bank of New York, 200
Federal Savings and Loan Insurance Corporation (FSLIC), 221
Fee income, options and, 1514
Feldstein, Sylvan G., 225, 995
Ferri, Michael G., 3
FFELP. See Federal Family Education Loan Program
FHA. See Federal Housing Administration
FHFA. See Federal Housing Finance Agency
FHLB. See Federal Home Loan Banks
FHLMC Series 3104, 895–897
FICO. See Fair Isaac Corporation
Fill-or-kill order, 1382
Finance bills, 342
Financial indentures, 975
asset coverage and, 984
asset quality in, 982–983
credit analysis of, 981–986
earnings record and, 985
leverage and, 983–984
liquidity and, 984
management and, 985
size and, 985–986
Financial industry
ownership in, 982
segments within, 981–982
Financial Industry Regulatory Authority (FINRA), TRACE program of, 55–56
Financial Information eXchange (FIX), 53–54
Financial risk, in credit analysis, 1218
Financing rate, 1399, 1401–1402
Finnerty, John D., 315
FINRA. See Financial Industry Regulatory Authority
Firm value, 1042
First and consolidated bonds, 265
First and refunding bonds, 265
First call date, 108
First derivative (mathematical term), 146–147
First loss piece, 665
First par call date, 108
First-to-default hedge (FTD), 1621
marked-to-market, 1623–1625
for sovereign risk, 1622, 1623
Fitch
corporate bonds ratings of, 278
municipal bond ratings of, 242–244
Fitzgerald, Wayne M., II, 681
FIX. See Financial Information eXchange
Fixed coupons, 663
Fixed income ETFs
active, 447
attributes of, 439
bonds compared to, 441–442
characteristics and mechanics of, 448–452
creation cost of, 453–454
discounts of, 453–456
execution risk adjustment for, 455–456
flow factor of, 454–455
fund distribution of, 448
futures compared to, 441–442
holdings transparency of, 448
index, 447
institutional investors of, 444–445
investment characteristics of, 440–446
leveraged, 446
liquidity of, 451–452
management of, 447
market price of, 450
NAV of, 450
options on, 445–446
OTC market vs., 450–451
premiums of, 453–456
in primary market, 449–450
retail investors and financial intermediaries strategies for, 443
in secondary market, 450–452
short selling of, 446
swaps compared to, 441–442
trading behavior of, 453–456
Fixed income floor, 902
Fixed income instruments. See also Electronic fixed income trading
electronic trading of, 53–54
pricing of, 66–67
retail investor access to, 63–66
retail investor participation in, 62–63
workflow for trading, 53
Fixed income multifactor risk modeling
credit risk and, 1054–1055, 1088–1091
curve risk and, 1053–1054, 1083–1088
defining, 1052–1053
factor exposure reports for, 1083
factor partition for, 1080–1081
idiosyncratic risk and, 1057–1058
implied volatility risk and, 1056
inflation risk and, 1057
issuer-specific risk and, 1096–1098
issue-specific risk and, 1094–1096
liquidity risk and, 1056–1057
motivation and structure underlying, 1050–1052
prepayment risk and, 1055–1056, 1091–1094
security partition for, 1081–1082
summary report for, 1077–1083
swap spread risk and, 1086–1088
tax-policy risk and, 1057
Fixed income securities
definition of, 1671
implied volatility change return and, 1677–1678
Other Market Return and, 1678
portfolio outperformance for, 1681–1682
pricing model for, 1671–1674
return splitting for, 1672–1674, 1679–1680
spread change return and, 1678–1679
surprise return and, 1675
time return and, 1675–1676
yield curve change return and, 1676–1677
Fixed income transitions. See also Transition management
case study of, 1288–1289
costs of, 1283–1284
event chronology for, 1278–1279
implementation issues specific to, 1286–1287
implementation shortfall example for, 1285–1286
metrics and objectives for, 1281–1283
risk and, 1280
risk/cost tradeoff in, 1286
timeline of, 1282
tradeoffs in, 1284–1285
uniqueness of, 1280–1281
Fixed-price call provision, 271
Fixed-rate bonds, 262
Fixed-rate mortgages, 484–485
constant payment, 510
payment calculation for, 488, 491
Fixed-rate payer, 1446, 1450, 1460
Fixed-rate payments
calculation of, 1455–1457
present value calculation for, 1464, 1467
Fixed-rate preferred stock, 477
Flat price, 101–102
Fleming, Michael J., 193
Flexible Treasury futures options, 1385
Floaters. See Floating-rate securities
Floating coupons, 663
Floating-rate issue, 227
valuation of, 436
Floating-rate notes, 317–318
capped vs. uncapped, 1391–1392
Floating-rate payer, 1446, 1450
Floating-rate payments
present value calculation for, 1457–1460, 1461, 1464, 1467
Floating-rate securities, 7, 238. See also Inverse floaters
callable, 356
CMOs and, 551–553
collar in, 355
coupon formula for, 354
coupon rate of, 7
discount margin for, 111–112
dual-indexed, 355
duration of, 360–361
features of, 354–356
floor in, 354
history of, 353
interest-rate risk for, 135–136
inverse, 355
portfolio strategies for, 362
prepayment option for, 356
price volatility of, 358–361
put provisions and, 356–357
range note, 355
required margin and, 362
spread measures for, 357–358
stepped-spread, 355
tranches and, 551–553
yield measures for, 111–113
Floorlets, 1528–1530
calibration of, 1534
definition of, 1525–1526
in floating-rate securities, 354
on LIBOR, 1390–1392
payoff rate for, 1532
straddle pricing, 1535–1536
swaptions vs., 1535, 1537–1538
trading insights for, 1530–1535
uses for, 1528
volatility and, 1532–1533
Flow factor, of fixed income ETFs, 454–455
Flow of funds structure, 998–999
Focardi, Sergio M., 21
FOMC. See Federal Open Market Committee
Foreign currencies, 1745
Foreign exchange (FX)
allocation outperformance, 1722
characteristics of, by currency, 1720–1721
cross-currency trades, 1744
forward outright buy, 1759–1760
forward outright sell, 1757
global yield curve allocation outperformance, 1724, 1726–1727
hedging, 1713–1715
local cross-term return, 1715
local market allocation and, 1715–1719
outright buy, 1755
outright sell, 1752–1753
portfolio outperformance, 1650, 1714–1716, 1719–1728
return splitting, 1712–1713
trades, 1747
Foreign Sovereign Immunities Act of 1976, 430
Forward contracts
definition of, 1371
futures contracts and, 1371
interest-rate swaps and, 1447
options compared to, 1372
OTC market and, 1387
Forward discount factor, 1458–1459, 1464, 1466
Forward rate agreements (FRAs), 1388
OTC market for, 1392–1393
Forward rates
arbitrage interpretation of, 792–793
binomial lattice model of, 831
break-even interpretation of, 792–793
as break-even rate, 749, 757–759
calculating, 764–765
cheap maturity sectors and, 759–760
decomposing of, 772–777, 788–791
determinants of, 770–777
implied, 183
for interest-rate swaps, 1466
international bond portfolio and, 1270–1273
as relative-value tools, 761–762
rolling yield interpretation of, 792–793
short-term, 184–185
spot rate and, 765–767
spot-rate curve and, 792
term structure and, 792
for Treasury securities, 181–183
yield curve shape and, 770–772, 1689–1690
yield curve trades and analysis of, 757–762
Forward start swaps
cumulative swap valuation lattice for, 1487
definition of, 1486
valuation of, 1486–1490
Forward starting, 1530
Forward-start swaps, 1449, 1472
FRAs. See Forward rate agreements
Freddie Mac. See Federal Home Loan Mortgage Corporation
Free cash flow (FCF), 987–988
Free operating cash flow, 960
Fridson, Martin, 949
FSLIC. See Federal Savings and Loan Insurance Corporation
FTD. See First-to-default hedge
Full faith and credit obligations, 230
Full-valuation approach, to interest-rate risk, 124–128
Fully Analytical Model, 1666, 1669, 1682
advantages of, 1697–1698
asset allocation with, 1702–1703
inflation and, 1704, 1706–1709
mortgages and, 1701, 1704, 1705
portfolio outperformance and, 1698–1701
Funded hedges
counterparty risk costs to, 1630–1631
economic downturn and, 1625–1629
important tips for, 1619–1620
purpose of, 1618–1619
sovereign defaults and, 1620–1625
trade-specific risks for, 1629–1630
unfunded hedges compared to, 1593–1595
unfunded hedges risk compared to, 1627–1629
Funds flow, 960
Fusion transactions, 682–683
Future Guarantees covenant, 972
Futures
cash equitization and, 444
fixed income ETFs compared to, 441–442
interest-rate risk controlled with, 1409–1428
Futures contracts. See also Interest-rate futures contracts
arbitrage model for, 1398–1401
asset allocation and, 1405
forward contracts and, 1371
long and short position in, 1370
options compared to, 1372
pricing, 1395–1403
theoretical, 1398–1403
trading of, 1386
Futures options, 1383–1386
covered call-writing strategy with, 1437–1440
protective put-buying strategy using, 1433–1437
Futures trading
clearing corporation and, 1382
liquidating position in, 1382
margin requirements and, 1383
mechanics of, 1386
types of orders in, 1380–1382
FX. See Foreign exchange
GAAP. See Generally accepted accounting principles
Gallegos, Daniel, 1277
Gamma, 306
flat, 1511
hedging, 1511–1513
GANs. See Grant anticipation notes
Gartland, William J., 1501
GASB. See Governmental Accounting Standards Board
GDP. See Gross Domestic Product
General market names, 252
General obligation bonds (GOs), 230
budgetary soundness with, 1005–1006
Cleveland default on, 1002
creditworthiness of, 996
debt burden and, 1004–1005
defaults and, 995
definition of, 3–4
economic concerns and, 1006–1007
Internet usage with, 1006
issuer scrutiny for, 1001–1002
key debt ratios for, 1005
legal opinion on, 997
negative trends for, 1020
tax burden and, 1006
Generally accepted accounting principles (GAAP), 957, 1022
Gerard, James M., 1247
Germany, Pfandbrief Act, 463–464
Giesecke, Kay, 1025, 1035, 1039–1041, 1043–1044
Ginnie Mae. See Government National Mortgage Association
Global credit portfolio management
bottom-up approach, 1188
challenge of, 1184–1185
credit analysis and, 1209–1210
credit relative value analysis and, 1186–1190
credit-curve analysis, 1208–1209
information processing in, 1184–1185
liquidity and trading analysis for, 1193–1194
primary market analysis for, 1191–1192
sector rotation strategies for, 1210–1211
spread analysis and, 1200–1204
structural analysis and, 1204–1208
top-down approach, 1188
total-return analysis and, 1191
trading constraints and, 1198–1200
Global curve allocation, 1719–1728
Global Emerging Market External Sovereign Plus Debt Index (IP00), 417
Global government bonds. See also International bonds
correlation relationships for, 45–49
geometric mean return vs. standard deviation for, 44
history of, 394–395
risk/return characteristics of, 43–45
Global High Yield Index (HW00), 417
Global portfolio, 1103. See also International bond portfolio
Gold Sheets, 296
Goldberg, Lisa, 1025, 1040–1041, 1043–1044
Goldstein, Robert, 645
Good-til-canceled order, 1382
GOs. See General obligation bonds
Government loans, 486
Government National Mortgage Association (Ginnie Mae), 513–514
agency pool programs for, 515–518
MBS programs of, 517–518
SMBS program of, 632–633
Governmental Accounting Standards Board (GASB), 257
Governmental Standards Accounting Board (GSAB), 1022
Government-sponsored enterprises (GSEs), 4, 16, 509. See also Federal Home Loan Mortgage Corporation; Federal National Mortgage Association
callable securities and, 212
definition of, 207
future uncertainty of, 487
guarantees of, 514–515
loans of, 486–487
nonactive and recently retired, 221–223
types of, 217
Grant anticipation notes (GANs), 236
Graphical user interface (GUI), 59–61
Greeks, 1672
Grieves, Robin, 1369
Grinold, Richard, 1179, 1303–1304
Gross Domestic Product (GDP)
aggregate demand sectors of, 70–72
corporate profits and, 73
definition of, 69
gap, 69–70
potential, 69–70
Gross interest, 960
Gross rents, 960
Gross revenues flow of funds structure, 999
GSAB. See Governmental Accounting Standards Board
GSEs. See Government-sponsored enterprises
Guaranteed bonds, 270
Guaranty fees, 497
GUI. See Graphical user interface
Haircuts, 1357
HAMP. See Home Affordable Modification Program
Hedge fund fixed income strategies, 1331
Hedge funds
as CMO investors, 565–566
convertible securities and, 943