Hedge ratio, 1421
formula for, 1435
Hedging. See also Duration hedging; Funded hedges; Unfunded hedges
basis affecting, 1420–1421
basis risk and, 1421
bond portfolio techniques with, 1114–1118
CDX.IG index and, 1607–1609
challenges facing, 1593, 1605–1613
with CIR model, 1112
collar strategy for, 1431
correlation and, 1605–1607
cost of, 1609–1610
covered call-writing strategy for, 1429–1430
currency management and, 1265–1266
definition of, 1414
delta, 1509–1511
dollar duration and, 1422–1426
DTS and, 1302–1306
with futures contracts, 1404, 1414–1421
FX, 1713–1715
gamma, 1511–1513
historical indicators for, 1612–1613
instrument selection for, 1414–1415
of international bonds, 401, 1253–1254
monitoring and evaluating, 1427–1428
need for, 1596–1600
with Nelson-Siegel model, 1112–1118
with options, 1428–1442, 1509–1513
with options on cash bonds, 1441–1442
performance of various vehicles, 1980-2010, 1606
performance trends in, 1612–1613
process, 1414
protective put-buying strategy for, 1428–1429
proxy, 1267
real-world challenges with, 1610–1612
short-term, 1419–1420
slippage and, 1609–1610
step-by-step guide to, 1595–1596
strategy comparison for, 1440–1441
strategy selection for, 1431–1432
with Svensson model, 1112–1113
swap, 286
tail risk, 1604
target rate for, 1415–1421
with Vasicek model, 1112
VIX index and, 1607–1609
yield spread and, 1426–1427
HEL. See Home equity loan
HELOC. See Home equity line of credit
Henderson, Brian J., 825, 1479
HERA. See Housing and Economic Recovery Act of 2008
HIC repo. See Hold-in-custody repo
Higher education bonds, 231, 1009
Highly Indebted Poor Countries (HIPC), 429
Highway revenue bonds, 1009–1011
High-yield bond portfolio
characteristics of, 1244–1245
considerations for, 1239–1245
diversification and, 1241–1244
management drift and, 1244
objectives for, 1240
performance attribution for, 1245
risk controls for, 1245
risk tolerance for, 1240–1241
High-yield bonds, 8, 277, 311–312
cash flow and, 987–988
competition and, 987
corporate structure and, 991
correlation relationships for, 45
covenants and, 991–992
credit analysis of, 986–992
deferred coupon structures for, 282
definitions and, 992
early redemption features of, 1222
in emerging markets, 412
issuer types for, 281–282
leverage and, 990
management and, 989–990
net assets in, 988–989
risk/return characteristics of, 40–43
supply and demand in, 1238
yield and spread of, 1237–1238
High-yield markets
cyclical and non-cyclical sector spreads, 2007, 1626
cyclical and non-cyclical sector total return in, 2008, 1625
High-yield portfolio management
bottom-up approach to, 1214–1235
drift in, 1244
elements of, 1213–1214
portfolio considerations for, 1239–1245
top-down approach to, 1235–1239
HIPC. See Highly Indebted Poor Countries
Ho, Thomas, 826–827
Holdbacks, CMBS, 685
Hold-in-custody repo (HIC repo), 1358–1359
Holding companies, 266
Ho-Lee binomial lattice model
with flat term structure, 832–835
with inverted term structure, 837
with normal term structure, 836
Ho-Lee interest rate model, 826–827
Hollingsworth, Curt, 1741
Home Affordable Modification Program (HAMP), 673–674
Home equity line of credit (HELOC), 654
Home equity loan (HEL), 654
Horizon return, 113. See also Total return
Horne, Jonathan L., 299
Hospital revenue bonds, 231, 1011–1012
Housing and Economic Recovery Act of 2008 (HERA), 487
Housing market
distressed property problems in, 671
financial crisis with, 670–671
geographic segmentation of, 671–672
macro-economy driven by, 670
property tier variation in, 672–673
Housing revenue bonds, 1012–1015
HPA. See Hybrid Performance Attribution
Huang, Jay, 1044
Huang, Ming, 1044
HUD. See Department of Housing and Urban Development
Hull, John, 827–828
Hull-White interest rate model, 827–828
Hull-White trinomial lattice model, 851–853
Human capital, 380
Hump risk, 816
Hump shifts, 815–816
HW00. See Global High Yield Index
cap structures of, 511–512
Hybrid convertible products, 904, 913–915
trust nonmandatory, 914
zero premium exchangeable debt, 914–915
Hybrid Performance Attribution (HPA), 1636, 1645–1647, 1672, 1695
IDBs. See Inter-dealer brokers
Idiosyncratic return, 1051
Idiosyncratic risk, 1057–1058, 1164
portfolio management and, 1094–1096
variables of, 1094
IEBs. See Interest Equalization Bonds
IFRNs. See Inverse floaters
ILBs. See Inflation-linked bonds
IMF. See International Monetary Fund
Implied forward rates, 183
Implied volatility, 1522–1523
change return, 1677–1678
portfolio outperformance exposure to, 1695–1697
risk, 1056
Income bonds, 263
Income ratios, 495
Income risk, 1131–1133
Incomplete-information credit model, 1026
calibration of, 1043
credit premium and, 1042–1043
credit spreads and, 1040–1041
dependent defaults and, 1041–1042
Indentures, 260
definition of, 970
rules for, 970–971
special covenants and situations for, 975–976
utility, 975–981
Index arbitrage, 1350
Index duration, 361
Index ETFs, 447
Index pricing date, 1745, 1754, 1758
Index replication, 1306–1310
Index settlement date, 1754, 1758
Indexes. See specific indexes
Industrial development and pollution control revenue bonds, 231
Industrial revenue bonds, 1015
Industry financial analysis
cash flow ratio, 961
corporate governance and, 967–968
for credit analysis, 958–968
intangibles, 964
net assets ratio, 963–964
ownership of firm and, 968
pension liabilities, 964–965
plant age and condition, 965
pretax interest coverage, 958–959
working capital, 965–966
Industry variables
accounting, 957–958
competition, 955–956
for credit analysis, 952–958
economic cyclicality, 953
growth prospects, 954
labor, 956–957
regulation, 956
research and development expenditures, 954
supply sources, 956
types of, 952–953
Inflation duration, 1057
Inflation policy, of U.S., 1337, 1339
Inflation risk, 27
fixed income multifactor risk modeling and, 1057
yield curve shifts and, 814
Inflation surprise return, 1675
Inflation-linked bonds (ILBs). See also Treasury Inflation Protected Securities
definition of, 6
history of, 373
international issuers of, 381–382
international market and, 375–376
investor types for, 379–380
real duration for managing, 378–379
strategic use of, 377–380
Information ratios, 1148
Initial margin, 1383
Institutional loans, 292
Insurance
municipal bond, 244–245
portfolio, 1518–1519
Insurance companies, as CMO investors, 564–565
Insured bonds, 235
Interaction, in performance attribution, 1640
Interchange fee, 718
Inter-dealer brokers (IDBs), 58
for Treasury securities, 200
Interest Equalization Bonds (IEBs), 424
Interest income, taxability of, 171–172
Interest rates. See also No-arbitrage interest rate models
base, 169
benchmark, 169
central bank and, 76
convertible valuation models and, 935–936
credit supply and demand determining, 70
economic expectations impacting, 799–800
lattice model, 858–862, 1481, 1483
mortgages and types of, 484–485
parity of, 1264
prepayments and effect of, 526
term structure of, 23, 171, 173, 185–189
top-down approach forecasting, 1236–1237
volatility of, 165–166
Interest rate derivatives, 1734–1735
Interest waterfalls, 740
Interest-only securities (IOs)
CMBS and, 698
SMBS and, 631–632
Interest-rate futures contracts. See also Futures contracts
advantages of, 1410
definition of, 1373
Eurodollar futures contracts, 1377–1378, 1385–1386
federal funds futures contracts, 1379
On-the-run Treasury futures contracts, 1379–1380
risk control with, 1409
swap futures contracts, 1378–1379
target dollar duration and, 1411–1413
Treasury bill futures contracts, 1377
Treasury bond futures contracts, 1373, 1376, 1384–1385
Treasury note futures contracts, 1376
types of, 1374–1375
Interest-rate paths
number of, 887–888
OAS and, 887–888
present value calculation for, 885–887
Interest-rate risk, 22
approaches to measuring, 123–124
controlling, 23, 1403–1405, 1410–1413
coupon rate impact on, 131
defining, 1102–1103
duration/convexity approach to, 137–149
effective convexity and, 876–878
effective duration and, 876–878
embedded options impact on, 131–132
evolution of, 1337–1338
for floating-rate securities, 135–136
full-valuation approach to, 124–128
futures controlling, 1409–1428
management model for, 1103
maturity impact on, 131
stress testing for, 128
yield level impact on, 136
yield-to-maturity and, 105–106
Interest-rate swaps. See also Swaps
canceling, 1474
cash-market instruments and, 1448–1449
credit risk and, 1474–1475
definition of, 1445–1446, 1479
forward contracts and, 1447
forward rates for, 1466
nongeneric, 1470–1474
payment computation for, 1451–1452
position interpretation for, 1447–1449
terminology for, 1449–1451
valuation of, 1451–1468
Interest-rate tree, binomial, 858–862, 867
Intermarket-sector spread, 170
Intermarket-spread swaps, 118–119
Intermediate-term bonds, 5
Internal rate of return, 110–111
International bond markets
accessing, 400–401
allocation decision for, 1271–1273
dollar-denominated, 389–397
German, 1274
historical context of, 386–387
instruments of, 387–388
investing outside index and, 1260
Japanese, 1262–1263, 1271–1274
non-dollar-denominated debt, 397–401
overview and scope of, 385–386, 1248–1249
sector selection for, 1259–1260, 1273–1275
United Kingdom, 1274
International bond portfolio
benchmark selection for, 1250–1251
bond-equivalent yield and, 1269–1270
break-even analysis and, 1270–1273
break-even spread movement and, 1272–1273
construction of, 1263–1275
conventional yield and, 1269–1270
currency management and, 1251–1255
currency selection in, 1258–1259
duration management for, 1259
excess returns and, 1257–1260
forward rates and, 1270–1273
hedged vs. unhedged returns for, 1253–1254
management, 1247–1248, 1255–1257
market sentiment estimation for, 1262
risk limits for, 1255
strategic allocation strategy for, 1260–1261
strategy development for, 1255–1257
tactical allocation strategy for, 1260–1261
technical analysis for, 1262
total return components of, 1263–1265
International bonds
capital gains prospects relative to U.S. bond prices for, 405–406
currency gain vs. U.S. dollar with, 406
currency risk and, 401–406
domestic issues in, 398
ETFs and, 400–401
motivations for issuance of, 387
mutual funds and, 400
offshore, 399
policy statements and, 1250
return objectives with, 402–406, 1249–1250
risk tolerances with, 1249–1250
types of, 388
yield vs. U.S. bonds with, 403–405
International Monetary Fund (IMF), 427, 429
International Swap and Derivatives Association (ISDA), 434, 1379, 1541–1542
In-the-money option, 1505–1506
Intra-Day Trading, 1737–1738
Intramarket-sector spread, 170
Inverse floaters (IFRNs), 7, 238, 355
CMO tranches and, 553–555
creation value of, 554–555
definition of, 320
leveraged, 322
leveraged collateral vs., 554–555
price volatility of, 361
as trade against forward rates, 555
Inverse IOs, 558
Inverse wealth, 764
Investment grade bonds
correlation relationships for, 45
indexes of, 36–38
risk/return characteristics of, 40–43
IOs. See Interest-only securities
IP00. See Global Emerging Market External Sovereign Plus Debt Index
ISDA. See International Swap and Derivatives Association
Issuance trust (IT), 709–711
Issuer default rate, 284
Issuer exposure, 1138–1139
Issuer redemption, 900, 928–929
Issuer risk, portfolio diversification and, 1311–1314
Issuer-capped indexes, 1158–1160
Issuer-specific risk, 1096–1098
CDS as protection against, 1177
controlling, 1174–1177
Issue-selection enhancements, 1142
Issue-specific risk, 1094–1096
J. P. Morgan (JPM)
Bear Stearns vs., 1610–1612
global government bond index, 37, 40
Jarrow, Robert A., 1039, 1043–1044
Johnson, Robert R., 123
Jones, E., 1034–1035
nonagency RMBS capital structure of, 665
Jump Zs, 558
accrual manipulation of, 610–611
cumulative vs. noncumulative, 609–610
jump rules for, 609
PACs and, 584
stick vs. nonstick, 610
Junk bonds. See High-yield bonds
Kahn, Ronald N., 1179, 1303–1304
Kalotay, Andrew, 828–829, 857, 1480
Kalotay-Williams-Fabozzi (KWF) binomial lattice model
with flat term structure, 838–839
with inverted term structure, 841
with normal term structure, 840
Kalotay-Williams-Fabozzi (KWF) interest rate model, 828–829
Karasinski, P., 829–830
KB Homes, 1626–1630
Key rate durations (KRDs), 23, 1083
bond index portfolios and, 1134–1135
Keynes, John Maynard, 799, 1341
Konstantinovsky, Vadim, 1151
Kothari, Vinod, 459
KRDs. See Key rate durations
Kurtosis, 31
KWF. See Kalotay-Williams-Fabozzi binomial lattice model; Kalotay-Williams-Fabozzi interest rate model
Kwun, David, 629
Laipply, Stephen, 439
Lando, David, 1043
Land-secured “dirt” bonds, 231, 1016
Latin America, Brady bonds in, 418
Lattice models
binomial, 831–841, 843–850, 857
calibrating, 862–866
interest rate, 858–862, 1481, 1483
restrictions of, 858
swap valuation using, 1480–1486
for valuation, 866
Law of one price, 1395–1396
Layered PACs
life volatility of, 626–627
structure of, 625–626
support bonds and, 624–627
Lazanas, Anthony, 1049, 1069, 1635, 1671, 1711
LBO. See Leveraged buyout
Lee, Jung, 289
Lee, Sang, 826–827
Legal risk, 29
Legislative covered bonds, 463–464
Lehman Brothers
collapse of, 328–329, 1192, 1300, 1542
counterparty risk of, 1630–1631
Letica, Nicholas C., 1501
Letter of credit-backed bonds, 235
Level risk, 816
Level shifts, 803–804
Leverage, 961–962
definition of, 959
from derivative contracts and security selection outperformance, 1730
financial indentures and, 983–984
framework for, 1731–1733
high-yield bonds and, 990
utility indentures and, 980–981
Leverage risk, credit risk vs., 1321–1322
Leveraged buyout (LBO), 30, 988
bridge financing and, 282
of RJR Nabisco, 280–281
Leveraged collateral, inverse floaters vs. 554–555
Leveraged Loan Index (LLI), 297
Leveraged loans
definition of, 289
pricing of, 293
recovery rates for, 294–296
on secondary market, 296–297
structure of, 291–292
terms of, 292–293
Leveraged speculation, options and, 1515
Li, Gary, 629
Liability framework risk, 1133
LIBOR. See London Interbank Offered Rate
LIBOR OAS (LOAS), 640–641
LIBOR TED swaps
cumulative swap valuation lattice for, 1497
valuation of, 1495–1497
Lien, 264–265
Liens covenant, 973
LIFFE. See London International Financial Futures Exchange
Limit order, 1380
Limitation on Indebtedness covenant, 1223
Lipper Group, 1128–1129
Liquid Yield Option Note (LYON), 14
Liquidity, 930
central bank insertion and removal of, 70, 74
of CMOs, 538
of emerging markets debt, 413, 417
enhancements, 338
of Eurodollar bonds, 391
Fed and, 74–75
financial indentures and, 984
of fixed income ETFs, 451–452
for global credit portfolio management, 1193–1194
in OTC market, 1388
of TIPS, 374
in top-down approach, 1238–1239
of Treasury securities, 173
Liquidity premium hypothesis, 752
in covered bonds, 467
in credit analysis, 1225–1227
fixed income multifactor risk modeling and, 1056–1057
of structured notes, 326
Liquidity theory of term structure, 188
LLB. See Lower loan balance pools
LLI. See Leveraged Loan Index
Lo, Violet, 1039
Loan Pricing Corporation (LPC), 296
Loan Syndications and Trading Association (LSTA), 296–297
Loan-to-value ratio (LTV ratio), 484
for CMBS, 684
loss severity and, 507
for mortgage applicants, 495
“silent seconds” and, 654–655
LOAS. See LIBOR OAS
LOC paper, 339
Local credits, 252
Local currency, 1745
London Interbank Offered Rate (LIBOR), 317–318, 485, 730, 1447, 1450
as benchmark, 1155
caps and floors on, 1390–1392
fixed rate of, 1378
hybrid index, 511–512
PCA on, 822
London International Financial Futures Exchange (LIFFE), 1378–1379
Long bond yields, 799–800
Long hedge, 1414
Long/short credit strategy, 1346–1347
Long-term bonds, 5
Long-term debt, 960
Loss severity, 507
Lower loan balance pools (LLB), 521
LPC. See Loan Pricing Corporation
LSTA. See Loan Syndications and Trading Association
LTV ratio. See Loan-to-value ratio
LYON. See Liquid Yield Option Note
MAC. See Municipal Assistance Corporation
Macaulay, Frederick, 145
Macaulay duration, 144–145
Macro investing
aggregated statistics understanding for, 1334–1337
changes in market variables relative to changes in economic growth for, 1334
government interference and, 1337
policy bias objective in, 1332–1333
political self-interest vs. national interest, 1340–1343
yield curve and, 1337–1341
Macro-economy
capital structure and, 84–86
central bank and, 74–77
corporate bonds and, 69
corporate profits in, 73
cyclicality of, 81–83
housing market driving, 670
interest rates and, 73–74, 801
overview of, 69–73
stagflation and, 83–84
standard undergraduate macroeconomics and, 802
yield curve and, 77–79
Madhavan, Ananth, 1277
Maintenance and replacement funds (M&R), 275
Maintenance margin, 1383
Maintenance of net worth clause, 280
Make-whole call provision, 10–11, 271–273
Malvey, Jack, 1183
Management/ownership risk, 1218–1220
Mandatory convertibles, 300
Mann, Steven V., 3, 259, 337, 353, 475, 1355, 1369, 1445
Margin buying, 1362–1363
Margin of safety, 959
Margin requirements, 1383
Market bid-ask spread, 27–28
Market flex language, 291
Market order, 1380
Market price, of fixed income ETFs, 450
Market risk, of structured notes, 326
Market sectors, 170
Market value, 1745, 1752, 1754, 1758
Market value of equity to total liabilities (MV/TL), 950–951
Market-if-touched order, 1381
Market-segmentation theory, 189
Market-value risk, 1131
Martellini, Lionel, 1043, 1101
Mason, Richard, 803
Mason, Scott, 1034–1035
Matched sales, 349
Maturity
of commercial paper, 338
importance of, 4
interest-rate risk and impact of, 131
of municipal bonds, 228
municipal bonds yield curve vs., 251
spread, 171
MBA. See Mortgage Bankers Association
MBS. See Mortgage-backed securities
MCF. See Modified cash-flow
MDA. See Multiple discriminant analysis
Mean-reversion analysis, 1202–1203
Medium-term notes (MTNs), 14
advantages of, 317
agency securities offering, 212
definition of, 285–286
primary distribution process of, 286
structured notes issued as, 317–318
Mergers covenant, 974
Merrill Lynch, 1130. See also Bank of America-Merrill Lynch
Miller, Merton H., 1043
“Mirror” swap index, 1156
Modeling risk, of OAS, 881
Modified cash-flow (MCF), 435–436
Modified convexity, 154
Modified duration
bond index portfolios and, 1134
effective duration vs., 143–144, 1410
Macaulay duration vs., 144–145
Modified-modified-restructuring clause (Mod-Mod Re), 1552–1553
Modified-restructuring clause (Mod-Re), 1552–1553
Modigliani, Franco, 1043
Mod-Mod Re. See Modified-modified-restructuring clause
Mod-Re. See Modified-restructuring clause
Mohebbi, Cyrus, 629
Moldova, 422
Money managers, as CMO investors, 565
Monte Carlo Simulation, 533
Moody’s Investor’s Service
corporate bond ratings of, 278
municipal bond ratings of, 240–241
Moral obligation bonds, 235, 1015
Morgan Stanley Smith Barney (MSSB)
global government bond index, 37, 40
investment-grade bond index, 37
Mortgages. See also Adjustable-rate mortgages; Fixed-rate mortgages
alt-A loans for, 488
amortization schemes for, 485–486
assumable, 525
call exposure of, 1136–1137
conforming vs. nonconforming loan limits for, 487
CPR for, 503–504
credit guarantees for, 486–487
credit risk and, 506–507
default risk and, 506–507
delinquencies with, 506
due-on-sale clause in, 525
financial crises with, 483
Fully Analytical Model and, 1701, 1704, 1705
interest-rate types for, 484–485
lien status on, 484
loan term for, 484
modification of, 673–675
negative amortization, 511
payment analysis for, 489–491
prepayment of, 503–505
prepayment risk and, 502–505, 1137
prepayments for, 492
products for, 513
recidivism and, 674–675
secondary market history of, 513–515
standby commitments and, 1389
structure of, 488–492
subprime loans for, 488
underwriting process for, 494–496
Mortgage applicants
credit scores of, 494–495
documentation requirements for, 496
front vs. back ratios for, 495
LTV of, 495
Mortgage Bankers Association (MBA), 657
Mortgage bond, 264–266
depository vs. nondepository in, 493
direct lender vs. broker in, 492
originators vs. servicers in, 493–494
Mortgage lending rates
generation of, 496–502
pooling options for, 499
rate/point matrix for, 498
risk-based pricing for, 501–502
sample point calculation for, 500
Mortgage loans. See Residential mortgage loans
Mortgage prepayments surprise return, 1675
Mortgage refinancing rates, simulated paths for, 884–887
Mortgage spread change return, 1701, 1704
Mortgage-backed securities (MBS), 1183. See also Agency MBS; Stripped mortgage-backed securities
accrued interest and, 522
agency pool programs for, 515–518
average life model for, 882
cash flow delay with, 521–522
definition of, 459
delivery standards for, 522–523
depositories for, 493
duration of, 1154
effective convexity and duration in, 533–534
Fannie Mae program for, 518
Ginnie Mae programs for, 517–518
negative convexity of, 533, 535
prepayment of, 523
prepayment risk and, 24
pricing of, 496
settlement cash flows and, 520–521
settlement procedure for, 519
simulation for, 883–885
static spread for, 882–883
TBA prices and, 519–521
trading characteristics of, 518–523
types of, 16–17
valuation of, 531–535
variance and, 522
Most recent portfolio pricing date, 1745
M&R. See Maintenance and replacement funds
MSRB. See Municipal Securities Rule Board
MSSB. See Morgan Stanley Smith Barney
MTN. See Medium-term notes
Multicurrency performance attribution, 1712–1728
Multi-dealer client systems, 58
Multifactor risk modeling. See also Fixed income multifactor risk modeling
applications of, 1058–1066
covariance matrix and, 1165
DTS approach for, 1314–1316
factors in, 1051–1052
general principle of, 1055
history-based, 1181
portfolio management and, 1059–1060
portfolio rebalancing and, 1062–1064
portfolio risk analysis with, 1060–1062, 1164–1166
scenario analysis based on, 1064–1066
TEV and, 1165
uses of, 1049
Multifamily revenue bonds, 231
Multiple discriminant analysis (MDA), 992–994
Multiple-price auctions, 195
Municipal Assistance Corporation (MAC), 1004
Municipal bonds, 5. See also General obligation bonds; Revenue bonds
AMTI and, 247–248
bankruptcy and, 995–996
commercial credit rating of, 238–244
corporate bonds compared to, 119–120
coupon features of, 227–228
credit analysis of, 1004
credit rating differences for, 249–250
deductibility of interest and, 248
defaults and, 996
derivative securities and, 237–238
electronic trading of, 63–66
equivalent taxable yield for, 245–246
ETFs and, 226
financial advisors and, 1003
Fitch ratings for, 242–244
hybrid and special security types of, 233–236
indexes for, 253–254
in-state vs. general market, 250–251
insurance for, 244–245
insured vs. uninsured, 251
issuer reputation and, 1003
legal opinions on, 228–229, 996–1001
maturity date of, 228
money market products for, 236–237
Moody’s Investor’s Service ratings of, 240–241
official statement for, 254, 1021
in primary market, 251–252
risk and, 227
Rule 15c2-12 and, 1021–1022
in secondary market, 251–253
Standard & Poor’s ratings of, 242–243
state and local taxes on, 249
tax provisions affecting, 246–249
types of, 229–238
underwriters and, 1003
valuation methods for, 245–246
yield curve vs. maturity of, 251
Municipal bond market
credit analysis and, 996
participants in, 226
regulation of, 254–257
size of, 225
Municipal Securities Rule Board (MSRB), 56, 255
Rule 15c2-12, 1021–1022
Murata, Alfred, 1319
Mutual funds, international bond, 400
MV/TL. See Market value of equity to total liabilities
NAS. See Nonaccelerating senior bonds
NASD. See National Association of Securities Dealers
NASDAQ, 1619
National Association of Securities Dealers (NASD), 55
National Federation of Municipal Analysts (NMFA), 257, 1022
Nationally recognized statistical rating organizations (NRSROs), 478–479
NAV. See Net asset value
Negative amortization mortgages, 511
Negative carry, 1401
Negative convexity, 133–134
Negative Pledge covenant, 973
Negative-amortization loan, 486
Negative-pledge clause, 269
Nelson-Siegel model
comparative analysis of, 1114–1118
hedging errors in, 1117
hedging with, 1112–1114
Net asset value (NAV), 28
of fixed income ETFs, 450
Net assets ratio, 963–964, 1745
Net share settlement, 302, 908
New money, 479
New York Stock Exchange (NYSE), 52–53
Nicholson, Marshall, 51
NMFA. See National Federation of Municipal Analysts
No-arbitrage interest rate models
BDT binomial lattice, 843–848
Black-Derman-Toy (BDT) model, 830–831
Black-Karasinski binomial lattice, 849–850
Black-Karasinski model, 829–830
definition of, 825
Ho-Lee binomial lattice, 832–837
Ho-Lee model, 826–827
Hull-White model, 827–828
Hull-White trinomial lattice, 851–853
Kalotay-Williams-Fabozzi (KWF) model, 828–829
KWF binomial lattice, 838–841
SDE and, 825
Nominal spread, 882
Nominal yield, 369
Nonaccelerating senior bonds (NAS), 662
Nonagency CMOs, agency CMOs vs., 558–559
Nonagency MBS
analysis of, 1322–1330
background on, 1319–1321
collateral recent performance for, 1328–1329
creation of, 1319–1320
deal structure analysis for, 1324–1325
economic credit risk vs. financial leverage risk with, 1321–1322
marketplace size for, 1320–1321
rating agency downgrades with, 1320
sample example of, 1325–1330
yield table for, 1329–1330
Nonagency RMBS, 16–17
capital structure of, 662–670
clean-up call option for, 664
CMBS compared to, 682
collateral analysis for, 652–657
collateral performance with, 657–661
credit burnout and, 658–659
credit risk with, 663, 677–678
cross-collateralization of, 664
definition of, 645
documentation for, 656
DTI and, 655–656
external credit enhancements with, 669–670
FICO scores with, 647
fixed vs. hybrid, 652
geography and, 656
industry structure of, 647–648
jumbo loan structure for, 665
lockout period for, 663
market evolution of, 648–652
negative amortization with, 656–657
OC/XS structure of, 662–663, 666–669
prepayment risk with, 663, 677–678
product types for, 647
risk layering with, 657
roll rate analysis for, 678–679
senior/sub structure for, 664–666
sequential vs. pro-rata payment for, 663
servicer stop-advance with, 661
servicing concerns with, 659, 661
subprime loan crisis impact on, 645–646, 650–652
triggers for, 663
vintages and, 654
Y-structure vs. H-structure, 664
Nonasset bonds, 1013–1014
Noncallable bonds, 10
Noncallable-for-life issues, 10
Noncumulative preferred stock, 15, 475
Nondetachable warrants, 14–15
Non-factoring securities, 1745
Non-Seasonally Adjusted, All-Urban Consumer Price Index (NSA CPI-U), 368
Nonsystemic risk, 1165
Non-term-structure risk factors, 1101
No-restructuring clause (No-Re), 1553
Not held order, 1381
Note rate, 488
Notional amount, 1445–1446
NRC. See Nuclear Regulatory Commission
NRSROs. See Nationally recognized statistical rating organizations
NSA CPI-U. See Non-Seasonally Adjusted, All-Urban Consumer Price Index
Nuclear Regulatory Commission (NRC), 1017
NYSE. See New York Stock Exchange
OAC. See Option-adjusted convexity
OAD. See Option-adjusted duration
OAS. See Option-adjusted spread
OASD. See Option-adjusted spread duration
OC. See Over-collateralization
OC/XS. See Over-collateralized/excess spread
Odd-lot trading systems, 58
Office of Thrift Supervision (OTS), 506
MBA standard compared to, 657
Off-market swaps, 1472
Off-the-run securities, 201
OIDs. See Original-issue discount bonds
OIS. See Overnight-index swaps
Old money, 479
One-cancels-other order, 1382
On-the-run securities, 201
On-the-run Treasury futures contracts, 1379–1380
Open order, 1382
Opening order, 1381
Open-maturity repo, 346
Operating income, 960
Optimal Risk Budgeting with Skill (ORBS), 1179
Options
call vs. put, 1371
convexity and, 1514
dealer, 1372
definition of, 1501
directionality and, 1514
on Eurodollar futures, 1385–1386
fee income and, 1514
on fixed income ETFs, 445–446
forwards contracts compared to, 1372
futures contracts compared to, 1372
hedging on cash bonds with, 1441–1442
hedging with, 1428–1442, 1509–1513
intrinsic value of, 1505–1506
leveraged speculation and, 1515
mechanism of, 1501–1503
OTC market for, 1389–1390
profit/loss graph for, 1502
single look, 1530
strategies for, 1515–1518
time value of, 1505
valuation of, 1504–1509
volatility of, 1507
Option cost, 641
Option premium, 1371
Option price, 1371
Option volatility skew, 931
Option-adjusted convexity (OAC), 677
Option-adjusted duration (OAD), 144, 534–535, 677, 889–890
Libor, 640–641
SMBS pricing with, 640–642
Option-adjusted spread (OAS), 245, 587, 675
agency CMOs and, 560
average life and, 891
bonds with embedded options, calculating, 873, 875–876
convexity, 890–891
deal call risk in, 562
definition of, 533
diminished use of, 1201
of FHLMC Series 3104, 895–897
of FHLMC Series 3145, 891, 893
forward curve bias in, 562
interest-rate paths and, 887–888
interpretation of, 888
modeling risk of, 881
option cost in, 888–889
PAC/support structure and, 894–897
prepayment in, 562
term structure model in, 561–562
tranches and, 560
variance reduction for, 888
zero-volatility, 883
Option-adjusted spread duration (OASD), 1308
Option-free bonds
convexity of, 155–157
duration of, 155–157
price volatility characteristics of, 128–130
price/yield relationship for, 94–95, 129, 135
valuation of, 867
Orange County, California, credit problems, 239–240
ORBS. See Optimal Risk Budgeting with Skill
Order-driven systems, 59
Original issuers, 281
Original-issue discount bonds (OIDs), 8, 228
definition of, 263
tax treatment of, 246–247
Originators, 493–494
OTC market. See Over-the-counter market
Other Market Return, 1678
OTS. See Office of Thrift Supervision
Out-of-the-money option, 1505–1506, 1531
Outperformance. See Portfolio outperformance
Output gap, 1339
Over-collateralization (OC), 466, 729
Over-collateralized/excess spread (OC/XS)
complications in structure of, 669
nonagency RMBS with, 662–663, 666–669
OC target in, 667
step-down date in, 667–668
Overnight repo, 346
Overnight-index swaps (OIS), 1472–1474
Over-the-counter market (OTC market), 35
cap and floor of LIBOR and, 1390–1392
Fixed income ETFs vs., 450–451
for forward contracts, 1387
for FRAs, 1392–1393
liquidity in, 1388
for options, 1389–1390
structure of, 1387–1389
for Treasury securities, 1390
PACquential bonds, 548–549
PACs. See Planned amortization class bonds
Pair-off, 1502
Pakistan, 422
Paltrowitz, Mark D., 681
Par spread, 1579
Parallel shifts, 809
Pari passu clause, 430, 708, 1547, 1573
Elliot Associates vs. Peru and, 431
WBCMT 2007-C32 and, 690
Parity, 301
Parity delta, 922
Parity value, 921
Park, Rachael, 315
Partial derivatives, 937–938
Partial duration, 818–819, 820
Partial money, 479
Participating bonds, 262–263
Pass-through transaction, 462
CMBS rates for, 697
Past Due Interest (PDI), 424
PAUG. See Pay-as-you-go
Pay-as-you-go (PAUG), 649
Pay-in kind debenture (PIK), 264, 282
Payment default, 971
Payment shock, 485
Pay-throughs, 18
PCA. See Principal component analysis
PDI. See Past Due Interest
Pension funds
allocation of, 1405
as CMO investors, 565
Pension liabilities, 964–965
Percent yield-spread analysis, 1203–1204
PERCS. See Preferred Equity Redemption Cumulative Stock
Perfect hedge, 1404
Performance attribution. See also Portfolio outperformance
algorithm for successful, 1636–1637
asset allocation and, 1640–1642
BC system of, 1168
benchmarks and, 1167–1168
bond index portfolios analyzing, 1148
Brinson model for, 1640
compounding and, 1638–1639
as data quality tool, 1667–1669
Excess Return Model for, 1688–1697
factor return attribution in, 1644–1645
factor-based, 1642–1643
flexibility and, 1639
framework for, 1167
Fully Analytical Model for, 1666, 1669, 1682, 1697–1709
for high-yield bond portfolio, 1245
hybrid, 1645–1647
inconsistent or missing data and, 1738–1739
interaction in, 1640
mathematics of, 1639–1647
model selection for, 1709–1710
multicurrency, 1712–1728
multi-period, 1637–1638
portfolio management and, 1635–1636, 1647–1667
practical use of, 1735–1739
principles of, 1636–1639
recursive allocation and, 1641–1642
recursive application and, 1645
sector-based, 1639–1642
security selection in, 1640–1642
Total Return Model for, 1681–1688
unified framework for, 1643–1647
Period forward rate, 1458
Perpetual preferred stock, 16
Persistence factor (PF), 763
Peru, Elliot Associates vs., 431
PF. See Persistence factor
Pfandbrief Act, Germany, 463–464
Phelps, Bruce D., 1151
Phillips, Don, 1128
Phillips curve analysis, 1339–1340
Phoa, Wesley, 797
Physical settle, 900
PIK. See Pay-in kind debenture
“Pipeline,” 494
Plain-vanilla sequential-pay structure, for CMOs, 891–894
Planned amortization class bonds (PACs)
amortization schedule for, 543
attraction of, 569–570
band drift of, 543
bands, 543–544
CMO and OAS support structure with, 894–897
CMOs, 543–546
CMOs with Z bonds and, 600–603
collar drift and, 577
collars impact on, 355–357
collars interacting with collateral coupons in, 574–577
collateral coupon impact on, 355–357
excess payment order impact on, 585–586
layered, 624–627
locked out, 580–581
rationale for, 545
schedules, 576
support bonds and, 546–547, 613–618
support TAC vs. support, 620–621
VADM bonds effect on, 584
yield curves for, 570–572
Z bonds and, 581–584
Z PACs, 605
Plato, 1332
Points premium, 922
Political risk, 29
Portable alpha strategies, 1406–1408
Portfolio
base currency of, 1744
book return, 1156
book yield, 1156
constraints, 1198–1199
covered calls and, 1520
derivative contracts and returns for, 1729–1730
diversification for, 1175–1176
DTS and diversification of issuer risk for, 1311–1314
duration, 147–149
duration changes for, 1403–1404
index tracking, 1306–1310
insurance, 1518–1519
issuer-specific risk control for, 1174–1177
quantitative methods for optimizing, 1178–1180
replicating, 1306–1310
securities held by, 1746
single vs. multiple contributions, 1140
strategies, 1518–1523
Portfolio analysis
benchmarks and, 1162–1168
cell-based, 1163–1164
Portfolio management. See also Bond portfolio management
aggregate analytics for, 1072–1073
asset-backed credit strategy for, 1343–1344
benchmarks and, 1072–1077
with capital structure arbitrage, 1344–1346
correlations and, 1074–1077
credit risk and, 1088–1091
curve risk and, 1083–1088
distressed investing strategy for, 1347–1348
DTS for, 1292
duration exposure and, 1086
factor exposure reports for, 1083
idiosyncratic risk and, 1094–1096
issuer-specific risk and, 1096–1098
issue-specific risk and, 1094–1096
long duration and, 1070
with long/short credit strategy, 1346–1347
macro views in, 1310–1311
market structure and exposure for, 1071–1073
multifactor risk modeling and, 1059–1060
performance attribution and, 1635–1636, 1647–1667
portable alpha strategies for, 1406–1408
prepayment risk and, 1091–1094
quantitative tools for, 1180–1181
risk budgeting for, 1059, 1070–1071, 1178–1179
scenario analysis for, 1064–1066, 1098–1099
success measured for, 1145–1148
summary report for, 1077–1083
swap spread risk and, 1086–1088
synthetic securities for yield enhancement in, 1405–1406
TEV used by, 1071
volatility and, 1074–1077, 1521–1523
Portfolio outperformance
from allocation methods, 1644
from common factors, 1644
components of, 1640–1642, 1666
compounding, 1735–1737
by currency, 1720–1721
from currency exposures, 1648–1649
with Excess Return Model, 1689, 1695
for fixed income securities, 1681–1682
with Fully Analytical Model, 1698–1701
FX, 1650, 1714–1716, 1719–1728
goals of, 1647
from implied volatility exposure, 1695–1697
Intra-Day Trading and, 1737–1738
from management of local markets, 1652–1653, 1666
requirements for, 1636–1637
from spread, 1698–1701
total, 1648
with Total Return Model, 1683, 1685
unsettled positions and, 1738
from yield curve exposure, 1653–1658, 1689–1695
Portfolio risk
analysis approaches for, 1070–1071
benchmarks vs., 1152
cell-based analysis for, 1163–1164
factor exposure reports for, 1083
market structure and exposure contributions to, 1071–1073
multifactor risk modeling for analyzing, 1060–1062, 1164–1166
summary report for, 1077–1083
yield curve shifts and management of, 813–816
POs. See Principal-only securities
Positive carry, 1400–1401
Positive convexity, 134
PPN. See Principal-protected structured note
PPPs. See Public-private partnerships
Predefault events, 1035–1036
Predefault market value, 1037–1038
Preferred dividend, 928
Preferred Equity Redemption Cumulative Stock (PERCS), 16
Preferred stock
advantages of, 476
contingent voting with, 475
cumulative vs. noncumulative, 15, 475
debt compared to, 15–16
issuance of, 476–478
rating agencies for, 478–479
sinking-fund provisions in, 476
tax considerations for, 15
tax treatment of, 479
types of, 477–478
Preferred Stock Purchase Agreements (PSPA), 209
Preferred-habitat theory, 188–189
Premium callable bonds, 1145
Premium collateral, 642
Premium coupon loans, 528
Premium leg
cash flow on, 1587
of CDX, 1564–1565
valuation of, 1576–1578
Premium makewhole, 905
Premium over parity, 922
Prepayment risk, 17
agency MBS and, 1092–1093
fixed income multifactor risk modeling and, 1055–1056, 1091–1094
MBS and, 24
with nonagency RMBS, 663, 677–678
portfolio management and, 1091–1094
Z bonds and, 603
Prepayment surprise outperformance, 1701
Prepayments
aging effect and, 527–528
burnout effect and, 528–529
CMBS and, 686
conventions of, 523–525
default and, 525–526
housing market and, 530
interest rate effect on, 526
involuntary, 507
of MBS, 523
models for, 530–531
of mortgages, 503–505
OAS, 562
seasonality and, 530
sources of, 525–530
support bonds and, 615–616
voluntary, 507
yield curve and, 530
Z bond speed of, 595–596
Prerefunding, municipal bonds, 11–12, 234–235
Present value, 1745–1746, 1754–1755, 1758–1759
for fixed-rate payments, 1464, 1467
for floating-rate payments, 1457–1460, 1461, 1464, 1467
for interest-rate paths, 885–887
Pretax income, 960
Priaulet, Philippe, 1101
Price risk, 362
Price value of a basis point (PVBP), 164–165, 1410
Price volatility
of bonds with embedded options, 132–135
of callable bonds, 132–134
coupon rate and, 8
in emerging markets, 415
of floating-rate securities, 358–361
of inverse floaters, 361
of option-free bonds, 128–130
of putable bonds, 134–135
yield level and, 165–166
Price/yield relationship
of callable bond, 158
of option-free bonds, 94–95, 129, 135
of putable bond, 161
Primary government securities dealers, 196
Primary market
agency securities in, 214–215
analysis, 1191–1193
fixed income ETFs in, 449–450
global credit portfolio management and, 1191–1192
market-structure dynamics and, 1192–1193
municipal bonds in, 251–252
product structure and, 1193
for Treasury securities, 195–199
Principal, 1746
of bond, 5–9
Principal component analysis (PCA), 1054
on LIBOR rates, 822
risk factors regrouped through, 1109–1111
for yield curve shifts, 805–813
Principal component dollar durations, 1110–1111
Principal strips, 204
Principal waterfall, 741
Principal-only securities (POs)
CMOs collateralized by, 633
SMBS and, 631–632
Principal-protected structured note (PPN), 328–329
Private bonds, 976
Private placement, 3
Pro rata loans, 291–292
nonagency RMBS and sequential vs., 663
Probabilistic modeling, 701
Profit/loss graph, 1502–1503, 1512, 1514, 1516–1518
Protection leg
of CDX, 1565
valuation of, 1578
Protective put-buying strategy
with futures options, 1433–1437
for hedging, 1428–1429
Proxy hedging, 1267
Proxy portfolios, 1169
PSA. See Public Securities Association
PSA model, 504–505
PSPA. See Preferred Stock Purchase Agreements
Public power revenue bonds, 232, 1016–1017
Public Securities Association (PSA), 524. See also Bond Market Association
Public-private partnerships (PPPs), 232, 1017–1018
Purchasing-power risk, 27
Pure bond indexing, 1123–1124. See also Bond index portfolios
enhanced, 1124–1125
Pure expectations theory, 185–188, 750
convexity bias and, 755
return-to-maturity expectations form of, 188
Pure revenue bonds, 1004
Pure yield pickup swaps, 116
Put, 1501
Put extension sweetener, 940
Put options, 1371
change of control, 940–941
for convertible bonds, 301
for convertible securities, 940–941
profit/loss graph for, 1503
Putable bonds
convexity of, 159–161
duration of, 159–161
price volatility of, 134–135
price/yield relationship of, 161
valuation of, 870–871
Putable structures, 1207–1208
Put-call parity, 1503–1504, 1508
PVBP. See Price value of a basis point
Quality spread, 170
analysis, 1203
Rachlin, Ellen, 1331
Railroad rolling stock, 267–268
Rainbow conversion option, 901
Ramamurthy, Shrikant, 1409
Ramanathan, Karthik, 385, 1247
Range floating-rate notes, 322–323
RANs. See Revenue anticipation notes
Rate basis, 1420
Rate shocks, 142–143
Rate-anticipation swaps, 117
Rating agencies, 25
for covered bonds, 469
credit card ABS criteria of, 721–723
nonagency MBS downgrades with, 1320
for preferred stock, 478–479
Rating migration table, 277
Rating outlook, 25
Rating transition tables, 26, 277, 279
Rating watch, 25
Real duration, 371
ILB management with, 378–379
Real estate investment trusts (REITs), 648, 970, 975
Real Estate Mortgage Investment Conduit (REMIC), 701
Real frame of reference, 368
the Taylor rule for, 375
of TIPS, 369
Realized BRP, 763
Rebonato, Riccardo, 817
Recidivism, 674–675
Records, 1744
Recoveries, 718
Recovery rates
of corporate bonds, 285
of leveraged loans, 294–296
Recursive allocation, 1641–1642
Reduced-form credit model, 1026
calibration of, 1039
default correlation and, 1038–1039
default intensity and, 1036–1037
valuation and, 1037–1038
REFCorp. See Resolution Funding Corporation
Reference Bill program, 211
Reference debt security, 902
Reference Notes program, 211, 214
Reference obligation, 332
Refunded bonds, 234–235
crossover, 234
Refunding, 10
Reilly, Frank K., 33
coupon rate and, 105
yield-to-maturity and, 105
REITs. See Real estate investment trusts
Relative market value, 36
Relative value analysis
CDS trends in, 1234–1235
credit analysis and, 1186–1190, 1227–1235
credit comparable analysis in, 1228–1230
duration in, 1235
quadrant analysis in, 1228, 1230–1232
risk/reward in, 1227–1228
scenario analysis for, 1232–1233
stock prices for, 1233–1234
trading history in, 1233
Remarketed preferred stock, 478
REMIC. See Real Estate Mortgage Investment Conduit
Repo margin, 1357
Repo market, 349–350
emerging markets debt and, 435
formula for, 1356–1357
implied (break-even), 1403
Republic (Plato), 1332
Repurchase agreements
credit risk with, 347–349, 1357–1359
definition of, 345–346, 1355–1356
HIC repo and, 1358–1359
margin in, 347–348
security lending compared to, 1364–1365
transaction formula for, 346
Repurchase date, 1356
Repurchase price, 1356
Request for quote systems, 59
Required margin, 362
Required yield
bond pricing and, 90–91, 94–95
bond pricing relationship with and coupon rate and, 95–96
Reserve Bank of New Zealand, 821
Reset strike cap/floor, 1527
Residential mortgage loans
analysis of, 1322–1323
servicing of, 1323–1324
Residential mortgage-backed security (RMBS), 16–17. See also Agency RMBS; Nonagency RMBS
Residual Option Certificates (ROCs), 238
Residual Option Longs (ROLs), 238
Residuals, 1673
Resolution Funding Corporation (REFCorp), 222
Resource recovery revenue bonds, 232
Rest date, 1449
Resting order, 1380
Restricted Payments covenant, 973–974, 1223
Restructuring, 282
CDS triggered from, 1559–1560
credit events and, 1551–1553
modified, 1552–1553
modified-modified, 1552–1553
no, 1553
Retail channel, 492
Retail fixed income investors
access for, 63–66
market participation of, 62–63
Retail investors, in CMOs, 566
Retail Prices Index (RPI), 6
Return on equity, 966
Return splitting
for fixed income securities, 1672–1674, 1679–1680
FX, 1712–1713
Revenue anticipation notes (RANs), 236
Revenue bonds
additional-bonds test for, 999–1000, 1020
asset-backed, 1000
continuing care retirement community, 231, 1008
dedicated tax-backed, 235, 1000, 1009
definition of, 4
flow of funds structure and, 998–999
highway, 1009–1011
housing, 1012–1015
industrial, 1015
industrial development and pollution control, 231
issuer scrutiny for, 1002
land-secured “dirt” bonds, 231, 1016
legal opinion on, 997–998
negative trends for, 1020–1021
new financing techniques for, 1000
revenue claims priority for, 999
security limits for, 998
toll road and gas tax, 233, 1009–1011
types of, 230–233
user-charge covenants and, 999
water and sewer, 233, 1018–1020
Reverse cash and carry trade, 1397
Reverse floaters, 355. See also Inverse floaters
Reverse market flex, 291
Reverse TACs
life volatility of, 622–624
support bonds and, 621–624
Reversing in securities, 347
Reversing out securities, 347
Revolving line of credit, 291
Rho, 306
Richard, Scott F., 881
RIG. See Rolling interest guarantee
Risk. See also Basis risk; Counterparty risk; Credit risk; Curve risk; Default risk; Event risk; Idiosyncratic risk; Interest-rate risk; Issuer-specific risk; Liquidity risk; Portfolio risk; Prepayment risk; Tail risk
of agency securities, 207
assessment checklist, 1223–1225
attribution, 1061
bond portfolio management and, 22, 1124, 1126
CDS management of, 1583–1589
CDX management of, 1591
contraction, 24
convertible bond valuation factors of, 306–308
country, 930
covenant, 1220
credit default, 277
curvature, 816
deal call, 563
dollar rolls and, 1362
downgrade, 25–26
exchange-rate, 28
extension, 24
fixed income transitions and, 1280
fixed income transitions and cost tradeoff with, 1286
funded hedges and trade-specific, 1629–1630
funded hedges vs. unfunded hedges, 1627–1629
high-yield bond portfolio control of, 1245
high-yield bond portfolio tolerance of, 1240–1241
hump, 816
implied volatility, 1056
interest-rate futures contracts controlling, 1409
international bond portfolio limits on, 1255
international bond tolerance with, 1249–1250
legal, 29
level, 816
market-value, 1131
municipal bonds and, 227
nonagency RMBS layering, 657
nonagency RMBS metrics of, 675, 677
nonsystemic, 1165
political, 29
price, 362
purchasing-power, 27
sector, 30
slope, 816
sovereign credit, 1602–1603
Standard & Poor’s analysis of, 968–969
of structured notes, 325–327
of student loans, 735–736
swap spread, 1086–1088
systemic, 327, 1088, 1164, 1165
tax, 29
tax-policy, 1057
TIPS strategies for, 378
tranches and, 881
types of, 21–22
yield curve, 23
Risk budgeting, 1059, 1070–1071
based on skill, 1178–1179
Risk factors
with bond index portfolios, 1133–1138
classification of, 1101
matching, 1126
mismatches, 1125
multiple, 1108–1109
PCA regrouping, 1109–1111
principal component dollar durations and, 1110–1111
in term structure of interest rates, 1101–1102
Risk modeling. See Multifactor risk modeling
Risk premium, 170
Risk-based pricing, 501–502
Riskless arbitrage opportunities, 756
RJR Nabisco LBO, 280–281
RMBS. See Residential mortgage-backed security
ROCs. See Residual Option Certificates
The Role of Monetary Policy (Friedman), 1332, 1334
Roll rate analysis, for nonagency RMBS, 678–679
Roller-coaster swaps, 1471
Rolling interest guarantee (RIG), 435, 438
Rolling yield, 763, 766, 769, 773
as expected return measure component, 778–779
forward rates interpretation of, 792–793
ROLs. See Residual Option Longs
Rosenberg, Barr, 1304
Rosenfeld, Eric, 1034–1035
RPI. See Retail Prices Index
Ru, Peter, 881
Rule of de minimus, 247
Russia, defaulted debt characteristics, 424–425, 427–428
Ryan Labs, 36–38
Sale/Leaseback covenant, 973
Sallie Mae. See Student Loan Marketing Association
Salomon Brothers Inc., 196
Samurai market, 399
Sarchese, Nicholas R., 1213
SCDOs. See Synthetic collateralized debt obligations
Scenario analysis, 784–788
flexible, 1181
history-based, 1166
maximum-likelihood, 1166
multifactor risk modeling as basis for, 1064–1066
for portfolio management, 1064–1066, 1098–1099
for relative value analysis, 1232–1233
for total return, 116–119
Scenario generation model, 1166
Scholes, Myron, 928, 932, 1026, 1035
Schwartz, Eduardo J., 932
Screw clause, 901
SDE. See Stochastic differential equation
Seaport revenue bonds, 232
SEC. See Securities and Exchange Commission
Secondary market
agency securities in, 215
CMOs in, 539
commercial paper in, 339
Fed in, 200–201
fixed income ETFs in, 450–452
leveraged loans on, 296–297
mortgages history in, 513–515
municipal bonds in, 251–253
for Treasury securities, 199–204
Yankee bonds in, 392–393
Secondary trade rationales
basis trades, 1198
cash flow reinvestment, 1198
credit-defense trades, 1195–1196
credit-upside trades, 1195
new-issue swaps, 1196
sector-rotation trades, 1196
structure trades, 1197
yield curve adjustment trades, 1197
yield-spread pickup trades, 1194–1195
Sector risk, 30
Sector rotation strategies, 1210–1211
Sector-level spread, 1699–1701
Sector/quality enhancements, 1143–1145
Sector-rotation trades, 1196
Securities Act of 1933, 254
amendment of 1975, 255
Securities and Exchange Act of 1934, 254, 1362
Securities and Exchange Commission (SEC)
bond disclosure rule of, 255
creation of, 254
electronic trading regulations of, 55–56
material event disclosure of, 256
Securities held by portfolio, 1746
Securities in index, 1755, 1759
Securities Industry and Financial Markets Association (SIFMA), 51–52
pool restrictions of, 522–523
Securitization. See also Credit card securitization
covered bonds compared to, 469–471
flow chart for, 728
SPV in, 727–728
Security borrower, 1363
Security lender, 1363
Security lending
definition of, 1363
repurchase agreements compared to, 1364–1365
Security selection
Euro breakdown for, 1664–1665, 1668
leverage from derivative contracts and outperformance of, 1730
in performance attribution, 1640–1642
U.S. dollar breakdown for, 1661–1663
Sell stop order, 1380–1381
Senior security, 16
senior/subordination structure (senior/sub), 664–666
Separate Trading of Registered Interest and Principal Securities (STRIPS), 6, 204. See also Zero-coupon bonds
Sequential payments, 663
Servicers, 493–494
Setting date, 1449
Settlement date, 1746
Settlement date holdings, 1746–1747
Settlement money, 1356
Sewer revenue bonds, 232, 1018–1020
SFR. See Swap fixed rate
Shared enhancement series, 711
in emerging markets, 415
Shenkman, Mark R., 1213
Short hedge, 1414
Short-term bonds, 5
Short-term forward rates, 184–185
Siegel, Jeremy, 369
SIFMA. See Securities Industry and Financial Markets Association
“Silent seconds,” 654–655
Simple margin, 357
Simulation, 883–887
Single look options, 1530
Single monthly mortality (SMM), 503, 524
Single-dealer client systems, 58
Single-family mortgage revenue bonds, 232
Single-price auctions, 195
Sinking-fund provisions, 5
accelerated, 274
for corporate bonds, 273–275
optional acceleration feature of, 12–13
in preferred stock, 476
specific vs. nonspecific, 275
Sinking-fund structures, 1206–1207
Skewness, 31
Slope duration, 814–815
Slope risk, 816
Slope shifts, 803–804
treasury bonds and, 810
SMBS. See Stripped mortgage-backed securities
SMM. See Single monthly mortality
Soft bullet maturity, 467
SONIA. See Sterling overnight interest rate average swaps
Sovereign CDS market, 1338–1339
Sovereign credit risk, 1602–1603
Sovereign debt restructurings
CACs and, 432
English law on, 432
global implications of, 427, 429
holdouts in, 431–432
immunity in, 430
New York law on, 432
no bankruptcy court in, 429–430
provision changes for, 431–432
funded hedges and, 1620–1625
Sovereign risk, 345
premium, 345
S&P. See Standard & Poor’s
Special-purpose entity (SPE), 461–462. See also Covered bonds
Special-purpose vehicle (SPV)
CLN structure as, 330–331
in securitization, 727–728
Specified pool trading, 521
Split-rated issuers, 975
Sports complex and convention center revenue bonds, 233
calculating, 764–765
definition of, 747
forward rates and, 765–767
short-term forward rates relationship with, 184–185
Treasury securities determined by, 179–181
Spot starting, 1530
Spot-rate curve, 175
forward rates and, 792
Spread analysis
alternative spread measures in, 1201–1202
global credit portfolio management and, 1200–1204
mean-reversion analysis, 1202–1203
percent yield, 1203–1204
quality, 1203
spread tools for, 1202
swap spreads in, 1201–1202
Spread change return, 1678–1679
Spread curve, 80
credit-spread risk measured with, 279, 1291–1292
Spread DV01, 1584–1587
Spread for life measure, 357
Spread measures, 357–358
Spread over swaps, 435
Spread products, 147
Spread risk, 147. See also Credit risk; Prepayment risk
sources of, 1094
Spread trades, 1517–1518
Spread volatility
DTS and, 1295–1298
predicting, 1298–1302
short-term vs. long-term forecasts of, 1299–1300
SPV. See Special-purpose vehicle
Stagflation, 83–84
Stairway note, 7
Standard & Poor’s (S&P)
corporate bond ratings of, 278
municipal bond ratings of, 242–243
risk analysis of, 968–969
S&P 500, 1594, 1600–1605, 1607, 1609–1614, 1617–1619
Standard deviation, 30–31
Standard undergraduate macroeconomics, 802
Standby commitments, 1389
Stated conversion price, 13
Static spread, 882–883
Step-down date, 667–668
Stepped-spread floaters, 355
Step-up bonds, 282
Step-up notes, 7
Sterling overnight interest rate average swaps (SONIA), 1473
Stochastic differential equation (SDE), 825
Stock market downturns
catalysts for, 1596–1597
correlations with, 1602
definition of, 1601
frequency of, 1600–1601
Stock market indexes, bond indexes vs., 35
Stop order, 1380–1381
Stop-advance, 661
Stop-limit order, 1381
Stop-out yield, 195
Story bond, 281
“Story” disagreement, 1199
STP. See Straight Through Processing
Straddle, 1515–1516
Straddle pricing, cap/floor, 1535–1536
Straight Through Processing (STP), 54
Straight-coupon bonds, 262
Strangle, 1516–1517
Stress testing, 128
of credit card master trust, 724–725
Stressed conditions, 1052
Strike price, 1501–1502
selecting, 1434–1435
Stripped mortgage-backed securities (SMBS)
cash flows for, 633–634
characteristics of, 630
effective duration and convexity of, 638–640
Fannie Mae program of, 629, 631–632
Freddie Mac program for, 632
Ginnie Mae program of, 632–633
investment characteristics of, 633–642
IOs and POS in, 631–632
market development for, 631
OAS and pricing of, 640–642
price performance of, 636
projected price behavior of, 638
types of, 630–631
Stripped yield, 420
STRIPS. See Separate Trading of Registered Interest and Principal Securities
Structural analysis
bullet structures, 1205–1206
callable structures, 1206
global credit portfolio management and, 1204–1208
putable structures, 1207–1208
sinking-fund structures, 1206–1207
Structural credit model
calibration of, 1034–1035
classical approach to, 1026–1028
credit premium and, 1033–1034
dependent defaults in, 1031–1033
first-passage approach to, 1028–1031
future prediction with, 1035–1036
Structural subordination, 968–969
Structure trades, 1197
Structured asset-backed bonds, 235
Structured covered bonds, 464–466
characteristics of, 316–319
credit risk of, 325–326
definition of, 315–316
Euro-MTNs and, 320
investor benefits of, 327–328
liquidity risk of, 326
market risk of, 326
MTN issuer of, 317–318
PPN, 328–329
risks of, 325–327
systemic risk of, 327
types of, 320–325
Structured POs, 558
Structured public convertibles, 915
Student Loan Marketing Association (Sallie Mae), 217, 222
Student loan revenue bonds, 233
Student loans
deferment of, 734
forbearance for, 734
government guaranteed, 733–734
private, 734–735
risks of, 735–736
Sturhahn, Chris, 1635, 1671, 1711
Subordination
in credit card master trust, 720–721
of debenture bonds, 269
structural, 968–969
Subprime loans, 488
capital structure of, 668
nonagency RMBS impacted by crisis with, 645–646, 650–652
Subsidiary, 1382
Subsidiary Debt covenant, 973
Substitute payment, 1364
Substitution swaps, 119
Support bonds
collars raised for, 617
creation of, 613
layered PACs and, 624–627
life variability of, 617–618, 627–628
lockouts and, 617
PACs vs. TAC, 620–621
prepayments and, 615–616
reverse TACs and, 621–624
Surprise return, 1675
Survival curve, 1579–1581
Svensson model, 1112–1113
Swap fixed rate (SFR), 1479
Swap futures contracts, 1378–1379
Swap rate, calculation of, 1457, 1460, 1462–1463
Swap spread, 1201–1202
definition of, 1468
determinants of, 1468–1470
Swap spread risk, 1086–1088
Swap-based indexes, 1160–1161
Swaps. See also Interest-rate swaps
accreting, 1471
amortizing, 1471
bond, 116–119
constant-maturity, 1471
Eonia, 1473
fixed income ETFs compared to, 441–442
forward-start, 1472, 1486–1490
hedging, 286
lattice models for valuation of, 1480–1486
LIBOR TED, 1495–1497
new-issue, 1196
off-market, 1472
overnight-index, 1472–1474
roller-coaster, 1471
sterling overnight interest rate average, 1473
as total return investment, 1176–1177
valuation of, 1462, 1464, 1468, 1498–1500
caps and floors vs., 1535, 1537–1538
cumulative swap valuation lattice for, 1491, 1494
definition of, 1475
strike rate and, 1477, 1499–1500
time to expiration for, 1477
valuation of, 1490–1495
volatility and, 1476–1477
yield curve changes and, 1475–1476
Syndicated loans, 290–291
Synthetic collateralized debt obligations (SCDOs), 335–336
Synthetic securities, 1405–1406
System repo, 349–350
Systemic return, 1051
DTS and, 1088
of structured notes, 327
TAC. See Targeted amortization class
Tactical allocations, 445
Tail risk, 1180
catalysts for, 1596–1597
frequency of, 1596
hedging, 1604
overview of select, 1600–1604
recent focus on, 1593
Tangent line, 140–141
TANs. See Tax anticipation notes
Target dollar duration, 1411–1413
Target price basis, 1420–1421
Target rate basis, 1420–1421
Targeted amortization class (TAC), 547–548, 602–603
reverse, 621–624
schedule for, 618
support PACs vs. support, 620–621
Tax anticipation notes (TANs), 236
Tax Reform Act of 1986, 700
Tax risk, 29
Taxable equivalent yield, 119–120
Tax-allocation bonds, 233
Tax-backed bonds, issuer scrutiny for, 1001–1002
Tax-exempt market. See Municipal bond market
Tax-policy risk, 1057
Taylor, John, 375
Taylor expansion, second-order, 1106–1107
The Taylor Rule, 375
TBA prices. See To-be-announced prices
TD. See Termination date
TED spread, 1495. See also LIBOR TED swaps
Tender offers, 276
Tender option bond (TOB), 238
Tennessee Valley Authority (TVA), 207, 217, 221
Term loans, 291
Term spread, 763
Term structure factor models, 1101
duration hedging, 1103–1107
duration-convexity hedging, 1107–1108
multiple risk factors in, 1108–1109
Term structure of interest rates, 23, 171, 173
determinants of, 770–772
liquidity theory for, 188
market-segmentation theory of, 189
preferred-habitat theory of, 188–189
pure expectations theory for, 185–188
risk factors in, 1101–1102
shape of, 185–189
Termination date (TD), 1557–1558
Term-to-maturity, 4
Territorial bonds, 236
TEV. See Tracking error volatility
Theoretical spot-rate curve
bootstrapping process for, 175–179
definition of, 175
Theta, 1513
Thrift CDs, 344
TIGRs. See Treasury Investment Growth Receipts
Time return, 1675–1676
Time value, 1505
TIPS. See Treasury Inflation Protected Securities
TLGP. See Treasury Liquidity Guarantee Program
To do repo, 347
To repo securities, 347
TOB. See Tender option bond
Tobacco revenue bonds, 233, 1018
To-be-announced prices (TBA prices), 519–521, 1173–1174
Toll road and gas tax revenue bonds, 233, 1009–1011
Top-down approach
corporate developments in, 1237
default expectations in, 1239
economic outlook in, 1236
equity market trends in, 1237
Fed policy in, 1236–1237
to global credit portfolio management, 1188
to high-yield portfolio management, 1235–1239
interest rates forecast in, 1236–1237
liquidity in, 1238–1239
market drivers and macro considerations for, 1236
market yield and spread in, 1237–1238
supply and demand in, 1238
Top-level spread, 1698–1699
Total adjusted margin, 357
Total debt, 960
Total future dollars, 114
Total return
arbitrage-free, 115
calculating, 113–115
in high-yield market cyclical and non-cyclical sector, 2008, 1625
international bond portfolio components of, 1263–1265
objections to, 114
scenario analysis for, 116–119
swaps as, 1176–1177
Total Return Model, 1681
asset allocation using, 1684–1688
formula for, 1682
portfolio outperformance breakdown using, 1683, 1685
TRACE. See Trade Reporting and Compliance Engine
Tracking error risk, 31–32, 1403
Tracking error volatility (TEV), 1059–1060
contributions to, 1075
multifactor risk modeling and, 1165
portfolio management using, 1071
Trade date, 1449
holdings, 1747
Trade rationales. See Secondary trade rationales
Trade Reporting and Compliance Engine (TRACE), 55–56, 1226
success of, 56
Trading constraints
buy-and-hold strategy, 1200
portfolio constraints, 1198–1199
seasonality, 1200
“story” disagreement, 1199
Tranches, 237
cash flow analysis of, 560
CLO structure of, 738
floating-rate securities and, 551–553
hedging, 560
inverse floaters and, 553–555
investor goals and constraints with, 559–560
loss allocation structure of, 1325–1326
OAS analysis for, 560
PACquential bonds and, 548–549
path dependency sources in, 883–884
risks of, 881
senior, 664–665
types of, 539–546
VADM bonds and, 550–551
Transition management, 444. See also Fixed income transitions
case study of, 1288–1289
focus of, 1277
history of, 1277–1278
Transunion, 494
Treasury auctions, 195
reopenings for, 198
schedule for, 197–198
Treasury bills, 194
discount rate, 202
futures contracts, 1377
quoting conventions for, 202–203
Treasury bonds, 194
curvature shifts and, 810
futures contracts, 1373, 1376, 1384–1385
parallel shifts in, 809
quoting conventions for, 203–204
slope shifts in, 810
Treasury Inflation Protected Securities (TIPS), 6, 194, 1704, 1706
ALM and, 377–378
appeal of, 366–367
break-even inflation rate for, 370–371
cash flow of, 366
corporate issuers of, 382
CPI and, 368
dedicated portfolios for, 378–379
definition of, 365–366
deflation protection for, 382–383
duration and, 371–373
history of, 373
international issues with, 375–376
investor types for, 379–380
issuers of, 380–382
liquidity of, 374
nominal yield of, 369
“real clean” vs. “nominal dirty” quotation of, 373–374
real frame of reference for, 368
real yield of, 369
risk/return optimization for, 378
strategic use of, 377–380
tactical use of, 375–376
taxation and, 382
Treasury rationale with, 380–381
valuation and performance dynamics of, 374–375
volatility of, 372
yield calculation for, 367
Treasury Investment Growth Receipts (TIGRs), 6
Treasury Liquidity Guarantee Program (TLGP), 222–223
Treasury notes, 194
futures contracts, 1376
quoting conventions for, 203–204
Treasury portfolios, benchmarks and, 1157
Treasury securities
bid-ask spreads for, 202–203
common uses of, 193
corporate bonds vs., 1143
coupon vs. discount, 194
debt buyback program for, 198–199
equivalent taxable yield and, 172
forward rates for, 181–183
IDBs for, 200
liquidity of, 173
off-the-run issues of, 201
on-the-run issues of, 201
OTC market for, 1390
primary dealers for, 196
primary market for, 195–199
secondary markets for, 199–204
spot-rates determining price of, 179–181
types of, 194
when-issued, 201
yield curve for, 173
Treasury STRIPS, 6
Tribal casino bonds, 233, 1018
Triggers
DSCR, 703
for nonagency RMBS, 663
Trinomial lattice models, 851–853, 857–858
Triparty repo, 1359
Troubled city bailout bonds, 236
Trust preferred securities, 478
Trustee Indenture Act, 260
Tucker, Matthew, 439
Tunaru, Radu S., 1525
Turnover, 525
TVA. See Tennessee Valley Authority
Ukraine, 422
Underlying securities, 332
Underlying stock, 899
mortgage process of, 494–496
municipal bonds and, 1003
Unfunded hedges
effectiveness of, 1613–1615
funded hedges compared to, 1593–1595
funded hedges risk compared to, 1627–1629
incorrect base case scenario for, 1617
payoff profile variance in, 1615–1616
purpose of, 1613
slippage with, 1617–1618
successful variations with, 1616
Unsettled buys, 1749
Unsettled sells, 1749–1750
Unsettled trades, 1747
Uruguay, 422–423
U.S. bond indexes
foreign appeal of, 389
geometric mean return vs. standard deviation in, 43
international bond yields vs., 403–405
international bonds capital gains prospects relative to bond prices of, 405–406
U.S. inflation policy, 1337, 1339
Useable bond feature, 933
Utility indentures
competition and, 979–980
corporate structure and, 979
credit analysis of, 975–981
energy sources and, 978–979
leverage and, 980–981
regulation of, 976–977
territory growth and stability in, 979
Utility industry
changing structure of, 976
segments within, 976–977
VA. See Veterans Affairs
VADM bonds. See Very accurately determined maturity bonds
Valuation. See also Convertible valuation models
of basis swaps, 1495–1497
of bonds with embedded options, 866–871
of Brady bonds, 420
of call options, 870
of callable bond, 866–870
of CDS, 1569–1571
CDS example, 1585–1588
of CDX, 1589–1591
convertible securities approaches with, 925–935
in emerging markets, 435–436
of existing CDS, 1574–1575
of floating-rate issue, 436
of forward start swaps, 1486–1490
of interest-rate swaps, 1451–1468
lattice models for, 866
lattice models for swap, 1480–1486
of LIBOR TED swaps, 1495–1497
at node, 860–862
of option-free bonds, 867
of options, 1504–1509
of par spread, 1579
of premium leg, 1576–1578
of protection leg, 1578
of putable bond, 870–871
in reduced-form credit model, 1037–1038
simulation method for, 883–887
of step-up callable notes, 871, 871–874
of step-up noncallable notes, multiple step-up, 871, 872
of swaps, 1462, 1464, 1468, 1498–1500
of swaptions, 1490–1495
Value diagram, for convertible securities, 920–923
Value recovery rights (VRRs), 436
Vanilla bonds. See Sequential CMOs
Variable-rate, 353
issue, 227
Variable-rate demand obligations (VRDOs), 237
Variation margin, 1383
Vasicek model, 1112
Vega, 306
Very accurately determined maturity bonds (VADM bonds)
CMO tranches and, 550–551
PACs and, 584
Veterans Affairs (VA), 486
Vintages, 654
VIX index, 1607–1609
Volatility. See also Price volatility; Spread volatility; Tracking error volatility
average life, 627–628
of bond pricing, 35
caps and, 1532–1533
convertible valuation models and implied, 939
convertible valuation models and stock, 936–937
decay, 1695
empirical, 1522
excess return, 1296–1297
floors and, 1532–1533
implied, 1522–1523, 1677–1678, 1695–1697
of interest rates, 165–166
layered PACs life, 626–627
long, 1511–1512
of options, 1507
portfolio management and, 1074–1077, 1521–1523
positions, 1513
reverse TACs life, 622–624
short, 1513
swaptions and, 1476–1477
of TIPS, 372
Volatility risk, 29
implied, 1056
Volatility trading, 1351–1352
Volpert, Kenneth E., 1123
Volume-weighted average price (VWAP), 1285
VRDOs. See Variable-rate demand obligations
VRRs. See Value recovery rights
VWAP. See Volume-weighted average price
WAC. See Weighted average coupon
Wachovia Bank Commercial Mortgage Trust, Series 2007-C32 (WBCMT 2007-C32), 686, 691
certificate structure of, 699
geographic concentration in, 688
loan sponsor concentrations in, 690
pari passu clause in, 690
property type concentration of, 689
stratification of amortization type of, 689
top loans in, 687
WAL. See Weighted average life
WAM. See Weighted average maturity
Warrants
definition of, 14
detachable vs. nondetachable, 14–15
WART. See Weighted average remaining term
Washington Mutual, 460
Washington Public Power Supply System, credit problems, 239–240
Water revenue bonds, 233, 1018–1020
WBCMT 2007-C32. See Wachovia Bank Commercial Mortgage Trust, Series 2007-C32
Weber, Stefan, 1039
Weighted average coupon (WAC), 497
of Freddie Mac pool, 515–516
Weighted average life (WAL), 675, 730–731
Weighted average maturity (WAM)
bonds, 521
of Freddie Mac pool, 516
Weighted average remaining term (WART), 572
Wells Fargo, 721–722
WFE. See World Federation of Exchanges
WGBI. See World Government Bond Index
What-if analysis, 1052
Wheeler, Ella, 1240
When-issued securities, 201
White, Alan, 827–828
White, Todd, 629
Whole loans, 564
Wholesale channel, 492
Williams, George, 828–829, 1480
Wilson, Eric P., 1635, 1671, 1711
Window rates, 214
Working capital, 965–966
World Federation of Exchanges (WFE), 51
World Government Bond Index (WGBI), 1251–1253, 1260
Wright, David J., 33
Writing puts, 1521
Yankee bonds
Eurodollar bonds vs., 390
history of, 392–393
issuers of, 392
market for, 393–394
in secondary market, 392–393
Yankee CDs, 344
Yield advantage, 927
Yield beta, 1426
Yield curve
adjustment trades, 1197
bond pricing with, 173–175
carry, 1691–1692
change return, 1676–1677
CMO structure of, 570–572
convexity bias impact on, 754–755
for corporate bonds, 77–79
decomposing, 777
determinants of, 770–772
downward-sloping, 185
enhancements, 1142–1143
Euro, Japanese Yen, British Pound, outperformance breakdown for, 1656–1658
exposure, 797
flat, 185
forward rates and shape of, 770–772, 1689–1690
for FX global allocation outperformance, 1724, 1726–1727
idiosyncratic behavior at short end of, 821–823
implied-swap, 758–759
influences on, 745, 749–750, 756–757
inverted, 185
macro investing and, 1337–1341
macro-economy and, 77–79
municipal bonds maturity vs., 251
normal, 185
for PACs, 570–572
parallel translation of, 1690–1691
portfolio outperformance due to exposure to, 1653–1658, 1689–1695
prepayments and, 530
rate expectations of, 750–751
risk, 23
with scenario analysis, 784–788
spread, 171
swaptions and changes in, 1475–1476
for Treasury securities, 173
U.S. dollar outperformance breakdown for, 1654
Yield curve shifts
determinants of, 797–805
economic expectations causing, 802–805
economic vs. noneconomic factors in, 798–801
empirical correlations vs. theoretical correlations for, 816–821
hump, 815–816
inflation risk and, 814
level, 803–804
parallel, 809
partial durations and, 818–819, 820
PCA identifying, 805–813
portfolio risk management and, 813–816
sensitivity to, 797
term premium and, 800–801
Yield curve trades, forward rate analysis for, 757–762
Yield income, as expected return measure component, 779
Yield measures, 102–113
for bond portfolio, 110–111
for floating-rate securities, 111–113
Yield spread, hedging and, 1426–1427
Yield table, 1329–1330
Yield volatility, 165–166, 931, 938
Yield-spread pickup trades, 1194–1195
Yield-tilt enhancements, 1143
Yield-to-call
definition of, 108
unrealistic assumptions about, 110
yield-to-maturity compared to, 109
Yield-to-maturity
annualizing procedure for, 107–108
calculating, 103–105
current yield formula and coupon rate relationship with, 107
definition of, 746
interest-rate risk and, 105–106
reinvestment risk and, 105
yield-to-call compared to, 109
for zero-coupon bonds, 106–107
Z bonds. See also Jump Zs
accrual structure of, 594–597, 599
CMO tranches and, 549–550, 597–600
CMOs with PACs and, 600–603
definition of, 593
history of, 593
PACs and, 581–584
performance of, 603–604
prepayment risk and, 603
prepayment speed with, 595–596
principal balance over time of, 595
structures with multiple, 605–611
trick, 607–609
yield of, 596–597
Z PACs, 605
Z score model, 993
Zero spread, 435
0/0 framework, 701
in bankruptcies, 262–263
pricing, 97–98
sample portfolio of, 785
yield-change split of, 773
yield-to-maturity for, 106–107
Zero-coupon Treasury securities, 204–205