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Fixed Income Securities: Tools for Today's Markets, 3rd Edition

ISBN: 978-0-470-89169-8
640 pages
November 2011
Fixed Income Securities: Tools for Today
Fixed income practitioners need to understand the conceptual frameworks of their field; to master its quantitative tool-kit; and to be well-versed in its cash-flow and pricing conventions. Fixed Income Securities, Third Edition by Bruce Tuckman and Angel Serrat is designed to balance these three objectives. The book presents theory without unnecessary abstraction; quantitative techniques with a minimum of mathematics; and conventions at a useful level of detail.

The book begins with an overview of global fixed income markets and continues with the fundamentals, namely, arbitrage pricing, interest rates, risk metrics, and term structure models to price contingent claims. Subsequent chapters cover individual markets and securities: repo, rate and bond forwards and futures, interest rate and basis swaps, credit markets, fixed income options, and mortgage-backed-securities.

Fixed Income Securities, Third Edition is full of examples, applications, and case studies. Practically every quantitative concept is illustrated through real market data. This practice-oriented approach makes the book particularly useful for the working professional.

This third edition is a considerable revision and expansion of the second. Most examples have been updated. The chapters on fixed income options and mortgage-backed securities have been considerably expanded to include a broader range of securities and valuation methodologies. Also, three new chapters have been added: the global overview of fixed income markets; a chapter on corporate bonds and credit default swaps; and a chapter on discounting with bases, which is the foundation for the relatively recent practice of discounting swap cash flows with curves based on money market rates.

[FOR THE UNIVERSITY EDITION]

This university edition includes problems which students can use to test and enhance their understanding of the text.

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Preface to the Third Edition xi

Acknowledgments xiii

An Overview of Global Fixed Income Markets 1

PART ONE The Relative Pricing of Securities with Fixed Cash Flows 47

CHAPTER 1 Prices, Discount Factors, and Arbitrage 51

CHAPTER 2 Spot, Forward, and Par Rates 69

CHAPTER 3 Returns, Spreads, and Yields 95

PART TWO Measures of Interest Rate Risk and Hedging 119

CHAPTER 4 One-Factor Risk Metrics and Hedges 123

CHAPTER 5 Multi-Factor Risk Metrics and Hedges 153

CHAPTER 6 Empirical Approaches to Risk Metrics and Hedging 171

PART THREE Term Structure Models 201

CHAPTER 7 The Science of Term Structure Models 207

CHAPTER 8 The Evolution of Short Rates and the Shape of the Term Structure 229

CHAPTER 9 The Art of Term Structure Models: Drift 251

CHAPTER 10 The Art of Term Structure Models: Volatility and Distribution 275

CHAPTER 11 The Gauss+ and LIBOR Market Models 287

PART FOUR Selected Securities and Topics 325

CHAPTER 12 Repurchase Agreements and Financing 327

CHAPTER 13 Forwards and Futures: Preliminaries 351

CHAPTER 14 Note and Bond Futures 373

CHAPTER 15 Short-Term Rates and Their Derivatives 401

CHAPTER 16 Swaps 435

CHAPTER 17 Arbitrage with Financing and Two-Curve Discounting 457

CHAPTER 18 Fixed Income Options 483

CHAPTER 19 Corporate Bonds and Credit Default Swaps 527

CHAPTER 20 Mortgages and Mortgage-Backed Securities 563

CHAPTER 21 Curve Construction 591

References 607

Index 609

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Bruce Tuckman holds a PhD in economics from MIT and began his career as a professor of finance at New York University's Stern School of Business. Moving to the industry, he became a managing director at Salomon Brothers' Fixed Income Proprietary Trading Group; ran research groups at Credit Suisse and Lehman Brothers; and, for the Prime Services Division at Barclays Capital, was global head of research and an executive committee member. He is now the Director of Financial Markets Research at the Center for Financial Stability, a think tank in New York.

Angel Serrat holds a PhD in finance from MIT. Prior to joining the industry, he was a member of the finance faculty at The University of Chicago's Graduate School of Business. He has published in journals including The Review of Economic Studies, The Review of Financial Studies, and Econometrica. He was an executive director of strategy groups at Goldman Sachs and Credit Suisse, and later became a managing director at JPMorgan's global proprietary positioning business as a portfolio manager and head of strategy. He is currently a partner at Capula Investment Management, a fixed income asset management firm.

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