Fixed Income Analysis (CFA Institute Investment Series)

Description

The essential guide to fixed-income portfolio management, from experts working with CFA Institute Fixed Income Analysis, 5th Edition delivers an authoritative overview of how successful investment professionals manage fixed-income portfolios. Back with expanded content on the defining elements of fixed income securities, corporate debt, repurchase agreements, term structure models, and more, the 5th edition gives students and practitioners alike the tools to understand and apply effective fixed income portfolio management tactics. Revised and updated by a team of investment experts in collaboration with CFA Institute, this text introduces the fundamental topics of fixed income securities and markets while also providing in-depth coverage of fixed income security valuation. This new edition offers refreshed and expanded content on the analysis and construction of active yield curve and credit strategies for portfolio managers. Thanks to a wealth of real-world examples, Fixed Income Analysis remains an excellent resource for professionals looking to expand upon their current understanding of this important facet of portfolio management, as well as for students in the undergraduate or graduate classroom. Through this text, readers will: Understand the main features and characteristics of fixed income instrumentsMaster the key return and risk measures of fixed income instrumentsDevelop and evaluate key fixed income investment strategies based on top-down and bottom-up analysis The companion workbook (sold separately) includes problems and solutions aligning with the text and allows learners to test their comprehension of key concepts. CFA Institute is the world’s premier association for investment professionals, and the governing body for the CFA® Program, CIPM® Program, CFA Institute ESG Investing Certificate, and Investment Foundations® Program. Investment analysts, portfolio managers, individual and institutional investors and their advisors, and any reader with an interest in fixed income markets will value this accessible and informative guide. Cover Title Page Copyright Contents Preface Acknowledgments About the CFA Institute Series PART I: Fixed Income Essentials CHAPTER 1: Fixed-Income Securities: Defining Elements Learning Outcomes 1. Introduction and Overview of a Fixed-Income Security 1.1. Overview of a Fixed-Income Security 2. Bond Indenture 2.1. Bond Indenture 3. Legal, Regulatory, and Tax Considerations 3.1. Tax Considerations 4. Principal Repayment Structures 4.1. Principal Repayment Structures 5. Coupon Payment Structures 5.1. Floating-Rate Notes 5.2. Step-Up Coupon Bonds 5.3. Credit-Linked Coupon Bonds 5.4. Payment-in-Kind Coupon Bonds 5.5. Deferred Coupon Bonds 5.6. Index-Linked Bonds 6. Callable and Putable Bonds 6.1. Callable Bonds 6.2. Putable Bonds 7. Convertible Bonds Summary Practice Problems CHAPTER 2: Fixed-Income Markets: Issuance, Trading, and Funding Learning Outcomes 1. Introduction 2. Classification of Fixed-Income Markets 2.1. Classification of Fixed-Income Markets 2.2. Fixed-Income Indexes 2.3. Investors in Fixed-Income Securities 3. Primary Bond Markets 3.1. Primary Bond Markets 4. Secondary Bond Markets 5. Sovereign Bonds 5.1. Characteristics of Sovereign Bonds 5.2. Credit Quality of Sovereign Bonds 5.3. Types of Sovereign Bonds 6. Non-Sovereign, Quasi-Government, and Supranational Bonds 6.1. Non-Sovereign Bonds 6.2. Quasi-Government Bonds 6.3. Supranational Bonds 7. Corporate Debt: Bank Loans, Syndicated Loans, and Commercial Paper 7.1. Bank Loans and Syndicated Loans 7.2. Commercial Paper 8. Corporate Debt: Notes and Bonds 8.1. Maturities 8.2. Coupon Payment Structures 8.3. Principal Repayment Structures 8.4. Asset or Collateral Backing 8.5. Contingency Provisions 8.6. Issuance, Trading, and Settlement 9. Structured Financial Instruments 9.1. Capital Protected Instruments 9.2. Yield Enhancement Instruments 9.3. Participation Instruments 9.4. Leveraged Instruments 10. Short-Term Bank Funding Alternatives 10.1. Retail Deposits 10.2. Short-Term Wholesale Funds 11. Repurchase and Reverse Repurchase Agreements 11.1. Structure of Repurchase and Reverse Repurchase Agreements 11.2. Credit Risk Associated with Repurchase Agreements Summary Practice Problems CHAPTER 3: Introduction to Fixed-Income Valuation Learning Outcomes 1. Introduction 2. Bond Prices and the Time Value of Money 2.1. Bond Pricing with a Market Discount Rate 2.2. Yield-to-Maturity 2.3. Relationships between the Bond Price and Bond Characteristics 2.4. Pricing Bonds Using Spot Rates 3. Prices and Yields: Conventions For Quotes and Calculations 3.1. Flat Price, Acc rued Interest, and the Full Price 3.2. Matrix Pricing 3.3. Annual Yields for Varying Compounding Periods in the Year 3.4. Yield Measures for Fixed-Rate Bonds 3.5. Yield Measures for Floating-Rate Notes 3.6. Yield Measures for Money Market Instruments 4. The Maturity Structure of Interest Rates 5. Yield Spreads 5.1. Yield Spreads over Benchmark Rates 5.2. Yield Spreads over the Benchmark Yield Curve Summary Practice Problems CHAPTER 4: Introduction to Asset-Backed Securities Learning Outcomes 1. Introduction: Benefits of Securitization 1.1. Benefits of Securitization for Economies and Financial Markets 2. How Securitization Works 2.1. An Example of a Securitization 2.2. Parties to a Securitization and Their Roles 3. Structure of a Securitization 3.1. Key Role of the Special Purpose Entity 4. Residential Mortgage Loans 4.1. Maturity 4.2. Interest Rate Determination 4.3. Amortization Schedule 4.4. Prepayment Options and Prepayment Penalties 4.5. Rights of the Lender in a Foreclosure 5. Mortgage Pass-Through Securities 5.1. Mortgage Pass-Through Securities 6. Collateralized Mortgage Obligations and Non-Agency RMBS 6.1. Sequential-Pay CMO Structures 6.2. CMO Structures Including Planned Amortization Class and Support Tranches 6.3. Other CMO Structures 6.4. Non-Agency Residential Mortgage-Backed Securities 7. Commercial Mortgage-Backed Securities 7.1. Credit Risk 7.2. CMBS Structure 8. Non-Mortgage Asset-Backed Securities 8.1. Auto Loan ABS 8.2. Credit Card Receivable ABS 9. Collateralized Debt Obligations 9.1. CDO Structure 9.2. An Example of a CDO Transaction 10. Covered Bonds Summary Practice Problems CHAPTER 5: Understanding Fixed-Income Risk and Return Learning Outcomes 1. Introduction 2. Sources of Return 3. Macaulay and Modified Duration 3.1. Macaulay, Modified, and Approximate Duration 4. Approximate Modified and Macaulay Duration 5. Effective and Key Rate Duration 5.1. Key Rate Duration 6. Properties of Bond Duration 7. Duration of a Bond Portfolio 8. Money Duration and the Price Value of a Basis Point 9. Bond Convexity 10. Investment Horizon, Macaulay Duration, and Interest Rate Risk 10.1. Yield Volatility 10.2. Investment Horizon, Macaulay Duration, and Interest Rate Risk 11. Credit and Liquidity Risk 12. Empirical Duration Summary Reference Practice Problems CHAPTER 6: Fundamentals of Credit Analysis Learning Outcomes 1. Introduction 2. Credit Risk 3. Capital Structure, Seniority Ranking, and Recovery Rates 3.1. Capital Structure 3.2. Seniority Ranking 3.3. Recovery Rates 4. Rating Agencies, Credit Ratings, and Their Role in the Debt Markets 4.1. Credit Ratings 4.2. Issuer vs. Issue Ratings 4.3. ESG Ratings 4.4. Risks in Relying on Agency Ratings 5. Traditional Credit Analysis: Corporate Debt Securities 5.1. Credit Analysis vs. Equity Analysis: Similarities and Differences 5.2. The Four Cs of Credit Analysis: A Useful Framework 6. Credit Risk vs. Return: Yields and Spreads 6.1. Credit Risk vs. Return: The Price Impact of Spread Changes 7. High-Yield, Sovereign, and Non-Sovereign Credit Analysis 7.1. High Yield 7.2. Sovereign Debt 7.3. Non-Sovereign Government Debt Summary Practice Problems PART II: Fixed Income Term Structure, Advanced Valuation, and Credit Analysis CHAPTER 7: The Term Structure and Interest Rate Dynamics Learning Outcomes 1. Spot Rates, Forward Rates, and the Forward Rate Model 1.1. Spot Rates and Forward Rates 2. Yield-to-Maturity in Relation to Spot and Forward Rates 2.1. Yield Curve Movement and the Forward Curve 3. Active Bond Portfolio Management 4. The Swap Rate Curve 4.1. Swap Rate Curve 4.2. Why Do Market Participants Use Swap Rates When Valuing Bonds 4.3. How Do Market Participants Use the Swap Curve in Valuation 5. The Swap Spread and Spreads as a Price Quotation Convention 5.1. Spreads as a Price Quotation Convention 6. Traditional Theories of the Term Structure of Interest Rates 6.1. Expectations Theory 6.2. Liquidity Preference Theory 6.3. Segmented Markets Theory 6.4. Preferred Habitat Theory 7. Yield Curve Factor Models 7.1. A Bond’s Exposure to Yield Curve Movement 7.2. Factors Affecting the Shape of the Yield Curve 8. The Maturity Structure of Yield Curve Volatilities and Managing Yield Curve Risks 8.1. Yield Volatility 8.2. Managing Yield Curve Risks Using Key Rate Duration 9. Developing Interest Rate Views Using Macroeconomic Variables Summary References Practice Problems CHAPTER 8: The Arbitrage-Free Valuation Framework Learning Outcomes 1. Introduction to Arbitrage-Free Valuation 1.1. The Meaning of Arbitrage-Free Valuation 1.2. The Law of One Price 1.3. Arbitrage Opportunity 1.4. Implications of Arbitrage-Free Valuation for Fixed-Income Securities 2. Arbitrage-Free Valuation for an Option-Free Bond 2.1. The Binomial Interest Rate Tree 3. The Basics of Creating a Binomial Interest Rate Tree 3.1. Determining the Value of a Bond at a Node 4. Calibrating the Binomial Interest Rate Tree to the Term Structure 5. Valuing an Option-Free Bond with a Binomial Tree 6. Valuing an Option-Free Bond with Pathwise Valuation 7. The Monte Carlo Method 8. Term Structure Models 8.1. Model Choice 8.2. Equilibrium Models 8.3. Arbitrage-Free Models 8.4. Modern Models Summary References Practice Problems CHAPTER 9: Valuation and Analysis of Bonds with Embedded Options Learning Outcomes 1. Introduction and Overview of Embedded Options 1.1. Overview of Embedded Options 2. Valuation and Analysis of Callable and Putable Bonds 2.1. Relationships between the Values of a Callable or Putable Bond, Straight Bond, and Embedded Option 2.2. Valuation of Default-Free and Option-Free Bonds: A Refresher 2.3. Valuation of Default-Free Callable and Putable Bonds in the Absence of Interest Rate Volatility 3. Effect of Interest Rate Volatility on the Value of Callable and Putable Bonds 3.1. Interest Rate Volatility 3.2. Level and Shape of the Yield Curve 4. Valuation of Default-Free Callable and Putable Bonds in the Presence of Interest Rate Volatility 4.1. Valuation of a Callable Bond with Interest Rate Volatility 4.2. Valuation of a Putable Bond with Interest Rate Volatility 5. Valuation of Risky Callable and Putable Bonds 5.1. Option-Adjusted Spread 5.2. Effect of Interest Rate Volatility on Option-Adjusted Spread 6. Bonds with Embedded Options: Effective Duration 6.1. Duration 7. One-Sided and Key Rate Duration 7.1. Key Rate Durations 8. Effective Convexity 9. Valuation and Analysis of Capped and Floored Floating-Rate Bonds 9.1. Valuation of a Capped Floater 9.2. Valuation of a Floored Floater 10. Valuation and Analysis of Convertible Bonds: Defining Features and Analysis of a Convertible Bond 10.1. Defining Features of a Convertible Bond 10.2. Analysis of a Convertible Bond 11. Valuation of a Convertible Bond and Comparison of Risk–Return Characteristics 11.1. Comparison of the Risk–Return Characteristics of a Convertible Bond, the Straight Bond, and the Underlying Common Stock Summary Practice Problems CHAPTER 10: Credit Analysis Models Learning Outcomes 1. Introduction 2. Modeling Credit Risk and the Credit Valuation Adjustment 3. Credit Scores and Credit Ratings 4. Structural and Reduced-Form Credit Models 5. Valuing Risky Bonds in an Arbitrage-Free Framework 6. Interpreting Changes in Credit Spreads 7. The Term Structure of Credit Spreads 8. Credit Analysis for Securitized Debt Summary References Practice Problems CHAPTER 11: Credit Default Swaps Learning Outcomes 1. Introduction 2. Basic Definitions and Concepts 2.1. Types of CDS 3. Important Features of CDS Markets and Instruments, Credit and Succession Events, and Settlement Proposals 3.1. Credit and Succession Events 3.2. Settlement Protocols 3.3. CDS Index Products 3.4. Market Characteristics 4. Basics of Valuation and Pricing 4.1. Basic Pricing Concepts 4.2. The Credit Curve and CDS Pricing Conventions 4.3. CDS Pricing Conventions 4.4. Valuation Changes in CDS during Their Lives 4.5. Monetizing Gains and Losses 5. Applications of CDS 5.1. Managing Credit Exposures 6. Valuation Differences and Basis Trading Summary Practice Problems PART III: Fixed Income Portfolio Management CHAPTER 12: Overview of Fixed-Income Portfolio Management Learning Outcomes 1. Introduction 2. Roles of Fixed-Income Securities in Portfolios 2.1. Diversification Benefits 2.2. Benefits of Regular Cash Flows 2.3. Inflation-Hedging Potential 3. Classifying Fixed-Income Mandates 3.1. Liability-Based Mandates 3.2. Total Return Mandates 3.3. Fixed-Income Mandates with ESG Considerations 4. Fixed-Income Portfolio Measures 4.1. Portfolio Measures of Risk and Return 4.2. Correlations between Fixed-Income Sectors 4.3. Use of Measures of Risk and Return in Portfolio Management 5. Bond Market Liquidity 5.1. Liquidity among Bond Market Sub-Sectors 5.2. The Effects of Liquidity on Fixed-Income Portfolio Management 6. A Model for Fixed-Income Returns 6.1. Decomposing Expected Returns 6.2. Estimation of the Inputs 6.3. Limitations of the Expected Return Decomposition 7. Leverage 7.1. Using Leverage 7.2. Methods for Leveraging Fixed-Income Portfolios 7.3. Risks of Leverage 8. Fixed-Income Portfolio Taxation 8.1. Principles of Fixed-Income Taxation 8.2. Investment Vehicles and Taxes Summary References Practice Problems CHAPTER 13: Liability-Driven and Index-Based Strategies Learning Outcomes 1. Introduction 2. Liability-Driven Investing 2.1. Liability-Driven Investing vs. Asset-Driven Liabilities 2.2. Types of Liabilities 3. Interest Rate Immunization: Managing the Interest Rate Risk of a Single Liability 3.1. A Numerical Example of Immunization 4. Interest Rate Immunization: Managing the Interest Rate Risk of Multiple Liabilities 4.1. Cash Flow Matching 4.2. Laddered Portfolios 4.3. Duration Matching 4.4. Derivatives Overlay 4.5. Contingent Immunization 5. Liability-Driven Investing: An Example of a Defined Benefit Pension Plan 5.1. Model Assumptions 5.2. Model Inputs 5.3. Calculating Durations 5.4. Addressing the Duration Gap 6. Risks in Liability-Driven Investing 6.1. Model Risk in Liability-Driven Investing 6.2. Spread Risk in Liability-Driven Investing 6.3. Counterparty Credit Risk 6.4. Asset Liquidity Risk 7. Bond Indexes and the Challenges of Matching a Fixed-Income Portfolio to an Index 7.1. Size and Breadth of the Fixed-Income Universe 7.2. Array of Characteristics 7.3. Unique Issuance and Trading Patterns 7.4. Primary Risk Factors 8. Alternative Methods for Establishing Passive Bond Market Exposure 8.1. Full Replication 8.2. Enhanced Indexing 8.3. Alternatives to Investing Directly in Fixed-Income Securities 9. Benchmark Selection Summary References Practice Problems CHAPTER 14: Yield Curve Strategies Learning Outcomes 1. Introduction 2. Key Yield Curve and Fixed-Income Concepts for Active Managers 2.1. Yield Curve Dynamics 2.2. Duration and Convexity 3. Yield Curve Strategies 3.1. Static Yield Curve 3.2. Dynamic Yield Curve 3.3. Key Rate Duration for a Portfolio 4. Active Fixed-Income Management across Currencies 5. A Framework for Evaluating Yield Curve Strategies Summary References Practice Problems CHAPTER 15: Fixed-Income Active Management: Credit Strategies Learning Outcomes 1. Introduction 2. Key Credit and Spread Concepts for Active Management 2.1. Credit Risk Considerations 2.2. Credit Spread Measures 3. Credit Strategies 3.1. Bottom-Up Credit Strategies 3.2. Top-Down Credit Strategies 3.3. Factor-Based Credit Strategies 4. Liquidity and Tail Risk 4.1. Liquidity Risk 4.2. Tail Risk 5. Synthetic Credit Strategies 6. Credit Spread Curve Strategies 6.1. Static Credit Spread Curve Strategies 6.2. Dynamic Credit Spread Curve Strategies 7. Global Credit Strategies 8. Structured Credit 9. Fixed-Income Analytics Summary References Practice Problems Glossary About the Editors About the CFA Program Index EULA