Tài liệu bond markets analysis and strategies 7th edition

Tài liệu bond markets analysis and strategies 7th edition Tài liệu bond markets analysis and strategies 7th edition Tài liệu bond markets analysis and strategies 7th edition Tài liệu bond markets analysis and strategies 7th edition Tài liệu bond markets analysis and strategies 7th edition Tài liệu bond markets analysis and strategies 7th edition Tài liệu bond markets analysis and strategies 7th edition

‘FOURTH EDITION Bond Markets, Analysis and Strategies Frank J Fabozzi, CFA Adjunct Professor of Finance School of Management Yale University Prentice Hall nee Prentice Hall International, inc ed — , * ` Senior Editor: Paul Donnelly Editorial Assistant: Cheryl Clayton Vice President/Editorial Director: James Boyd Assistant Editor: Gladys Soto Marketing Manager: Patrick Lynch Production Manager: Gail Steier de Acevedo Production Coordinator: Maureen Wilson Permissions Coordinator: Monica Stipanov Manufacturing Buyer: Natacha St Hill Moore Senior Manufacturing Manager: Vincent Scelta Cover Design: Bruce Kenselaar Cover Art/Photo: John Nelson/Stock Illustration Source, Inc Full Service Composition: UG / GGS Information Services, Inc Copyright â 2000, 1996, 1993, 1989 by Prentice-Hall, Inc Đ=6Upper Saddle River, New Jersey 07458 All rights reserved No part of this book may be reproduced, in any form or by any means, without written permission from the Publisher ISBN 0-13-085913-3 Prentice-Hall Prentice-Hall Prentice-Hall Prentice-Hall Prentice-Hall International (UK) Limited, London of Australia Pty Limited, Sydney Canada Inc., Toronto N Hispanoamericana, S.A., Mexico of India Private Limited, New Delhi Prentice-Hall of Japan, Inc., Tokyo Prentice-Hall Asia Pte Ltd., Singapore Editora Prentice-Hall Brasil, Ltda., Rio de Janerio ~ Printed in the United States of America 109876543 To the memory of two wonderful mothers, Josephine Fabozzi and This edition may be sold only in those countries to which it is consigned by Prentice-Hall International It is not to be re-exported and is not for sale in the U.S.A., Mexico, or Canada Drentice Beau Lid il Wie a | Patricia Marie Hieber yore Ca j- — Lee es "— -_ Brij Content + * ` = “ Preface Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter 10 11 12 Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter 13 14 15 16 17 18 19 20 21 22 23 xv Introduction Pricing of Bonds 12 Measuring Yield 33 Bond Price Volatility 55 Factors Affecting Bond Yields and the Term Structure of Interest Rates 88 Treasury and Agency Securities Markets 122 Corporate Debt Instruments 143 Municipal Securities 177 Non-U.S Bonds 197 Mortgage Loans 217 Mortgage Pass-Through Securities 231 Collateralized Mortgage Obligations and Stripped Mortgage-Backed Securities 259 Asset-Backed Securities 319 Analysis of Bonds with Embedded Options 338 Analysis of Mortgage-Backed Securities 366 Analysis of Convertible Bonds 389 Active Bond Portfolio Management Strategies 401 Indexing 434 Liability Funding Strategies 447 Bond Performance Measurement and Evaluation 479 Interest-Rate Futures Contracts 499 Interest-Rate Options 528 Interest-Rate Swaps and Agreements 570 Index 595 vii TỶ „ t J i "“— mm Contents Preface XV CHAPTER Introduction Sectors of the U.S Bond Market Overview of Bond Features 2 Risks Associated with Investing in Bonds Financial Innovation and the Bond Market Overview of the Book CHAPTER Pricing of Bonds Review of Time Value of Money Pricing a Bond 12 12 19 Complications 26 Pricing Floating-Rate and Inverse-Floating-Rate Securities Price Quotes and Accrued Interest 29 CHAPTER3 Measuring Yield 27 33 Computing the Yield or Internal Rate of Return on Any Investment Conventional Yield Measures 36 Potential Sources of a Bond’s Dollar Return Total Return 47 Ự CHAPTER Bond Price Volatility 44 55 Review of the Price-Yield Relationship for Option-Free Bonds Price Volatility Characteristics of Option-Free Bonds 57 Measures of Bond Price Volatility 59 Convexity 33 55 68 Additional Concerns When Using Duration Don’t Think of Duration as a Measure of Time 77 —_77 Approximating a Bond’s Duration and Convexity Measure 78 ` Mu cớ te -keaead* x “€oment — Measuring Bond Portfolio’s Responsiveness to Nonparallel Changes in Interest Rates 80 CHAPTERS Factors Affecting Bond Yields and the Term Structure of Interest Rates Base Interest Rate Risk Premium 88 89 89 Term Structure of Interest Rates CHAPTER 122 Strips 135 CHAPTER 7: 136 Corporate Debt Instruments Corporate Bonds 167 Municipal Securities 177 Municipal Money Market Products 179 CHAPTER 13 185 Municipal Derivative Securities 186 189 Risks Associated with Investing in Municipal Securities Yields on Municipal Bonds 194 197 Classification of Global Bond Markets Foreign Exchange Risk and Bond Returns Size of the World Bond Market Eurobond Market 201 Clearing Systems 213 236 - 240 © 247 :250 199 201 : 205 = 212 207 253 Collateralized Mortgage Obligations and Stripped Mortgage-Backed Securities 259 260 _ 283 Asset-Backed Securities 319 319 Credit Risk Cash Flow of Asset-Backed Securities 321 322 Auto Loan-Backed Securities Credit Card Receivable-Backed Securities 324 Home Equity Loan-Backed Securities 328 Manufactured Housing-Backed Securities 333 CHAPTER 14 198 Overview of Several Non-U.S Government Bond Markets Emerging Market Bonds 190 191 Non-U:S Bonds Sovereign Bond Ratings WAC and WAM 231 235 Collateralized Mortgage Obligations Stripped Mortgage-Backed Securities 178 Types and Features of Municipal Securities Municipal Bond Market Mortgage Pass-Through Securities Cash Flow Characteristics CHAPTER 12 171 Investors in Municipal Securities Credit Risk 226 Prepayment Risk and Asset/Liability Management 254 Secondary Market Trading Bankruptcy and Creditor Rights CHAPTER 218 Cash Flow Yield 164 Commercial Paper Participants in the Mortgage Market Alternative Mortgage Instruments 221 Risks Associated with Investing in Mortgages Cash Flow for Nonagency Pass-Throuphs 251 143 144 Medium-Term Notes 217 217 236 Agency Pass-Throughs 237 Nonagency Pass-Throughs Prepayment Conventions and Cash Flow Factors Affecting Prepayment Behavior 134 - Federal Agency Securities CHAPTER 122 : Stripped Treasury Securities Mortgage Loans What Is a Mortgage? CHAPTER 11 96 Treasury and Agency Securities Markets Treasury Securities CHAPTER 10 Analysis of Bonds with Embedded Options Drawbacks of Traditional Yield Spread Analysis 339 Static Spread: An Alternative to Yield Spread 339 Callable Bonds and Their Investment Characteristics 340 Components of a Bond with an Embedded Option 346 Valuation Model 347 Option-Adjusted Spread 359 Effective Duration and-Convexity 260 338 ng XH ŒŒC1 NHI VU : + trrven one soy Contents CHAPTER Contents 15 Analysis of Mortgage-Backed Securities Static Cash Flow Yield Methodology CHAPTER 16 Currently Traded Interest-Rate Futures Contracts 374 Bond Portfolio Management Applications Analysis of Convertible Bonds 389 CHAPTER 22 389 Market Conversion Price 392 393 Active Bond Portfolio Management Strategies Overview of the Investment Management Process The Use of Leverage CHAPTER 18 Indexing 402 406 424 CHAPTER 19 434 436 438 444 445 Liability Funding Strategies 447 448 Immunization of a Portfolio to Satisfy a Single Liability Structuring a Portfolio to Satisfy Multiple Liabilities Extensions of Liability Funding Strategies 453 467 471 Combining Active and Immunization Strategies 471 Bond Performance Measurement and Evaluation Requirements for a Bond Performance and Attribution Analysis Process Performance;Measurement 480 Performance Attribution Analysis CHAPTER21 488 Interest-Rate Futures Contracts Mechanics of Futures Trading Futures versus Forward Contracts 548 500 502 499 532 549 Sensitivity of Option Price to Change in Factors 479 480 556 560 Interest-Rate Swaps and Agreements 571 Interest-Rate Agreements (Caps and Floors) Index 595 442 General Principles of Asset/Liability Management CHAPTER 20 Option Price Models for Pricing Options Interest-RateSwaps Logistical Problems in Implementing an Indexing Strategy Enhanced indexing | CHAPTER 23 Objective of and Motivation for Bond Indexing Indexing Methodologies 401 434 Diversification and Portfolio Size 530 Profit and Loss Profiles for Simple Naked Option Strategies Put-Call Parity Relationship and Equivalent Positions 545 Hedge Strategies Factors to Consider in Selecting anIndex ‘Bond Indexes 436 528 Intrinsic Value and Time Value of an Option 394 510 518 529 Exchange-Traded Futures Options 394 Investment Characteristics of a Convertible Bond Options Approach 306 — 503 529 Types of Interest-Rate Options Current Income of Convertible Bond versus Stock Active Portfolio Strategies Interest-Rate Options Options Defined Downside Risk with a Convertible Bond 503 Pricing and Arbitrage in the Interest-Rate Futures Market 384 Convertible Bond Provisions CHAPTER 17 Risk and Return Characteristics of Futures Contracts 367 Monte Carlo Simulation Methodology Total Return Analysis 366 590 570 534 t xiii Preface to the Fourth Edition ụ i The first edition of Bond Markets, Analysis and Strategies was published in 1989 The objective was to provide coverage of the products, analytical techniques for valuing bonds and quantifying their exposure to changes in interest rates, and portfolio strategies for achieving a client’s objectives In the two editions subsequently published and in the current edition, the coverage of each of these areas has been updated In the product area, the updating has been primarily for the latest developments in mortgage-backed securities and asset-backed securities, The updating of analytical techniques has been in the valuation of bonds with embedded options and measures for assessing the interest rate risk of complex instruments Strategies for accomplishing investment objectives, particularly employing derivative instruments, have been updated in each edition Each edition has benefited from the feedback of readers, instructors using the book at universities and training programs, and CFA candidates who have used the book in their studies Many discussions with portfolio managers and analysts, as well as my experiences serving on the board of directors of several funds and consulting assignments, have been invaluable in improving the content of the book Moreover, my fixed income course at Yale’s School of Management and various presentations to institutional investor groups throughout the world provided me with the testing ground for new material Tam indebted to the following individuals who shared with me their views on various topics covered in this book: Scott Amero (BlackRock Financial Management), Anand Bhattacharya (Countrywide Securities), Douglas Bendt (Mortgage Risk Assessment Corporation), David Canuel (Charter Oak Capital Management), John Carlson (Fidelity Management and Research), Dwight Churchill (Fidelity Management and Research), Ravi Dattatreya (Sumitomo Bank Capital Markets), Mark Dunetz (Guardian Life), Sylvan Feldstein (Guardian Life), Michael Ferri (George Mason University), John Finnery (Fordham University), Gifford Fong (Gifford Fong Associates), Jack Francis (Baruch College, CUNY), Laurie Goodman (Paine Webber), Joseph Guagliardo (FNX), David Horowitz (Miller, Anderson & Sherrerd), Frank Jones (Guardian Life), Andrew Kalotay (Andrew Kalotay Associates), Dragomir Krgin (Merrill Lynch), Martin Leibowitz (CREF), Jack Malvey (Lehman Brothers), Steven Mann (University of South Carolina), Jan Mayle (TIPS), William McLelland, Franco Modigliani (MIT), Ed Murphy (Merchants Mutual Insurance), Scott Pinkus (White Oak Capital Management), Sharmin Mossavar-Rahmani XV pregency pee} § Su penne wk ts copies i i proce ¬— ) tên nợ i see Preface to the Fourth Edition Assessment n Sachs Asset Management), Chuck Ramsey (Mortgage Risk Ryan (Ryan Fabs), Ron ), Sherrerd & n Anderso (Miller, Richard Scott Coreoration) Z IBCA), Ben wot Dexter Senft (Lehman Brothers), Richard Wilson (Fitch Paul Zhao ( Group), Advisors hanna (Susque Yuen David Stanley), (Morgan u Zhu (Merrill Lynch) comments from a number of colleagues using ah Ree vectived ixtromely individuals helped me refine this edition and I These the text in an academic setting ns They are: suggestio their of tive apprecia sincerely am Russell R Wermers, University of Colorado at Boulder John H Spitzer, University of lowa John Edmunds, Babson College of providing up-toI am confident that the fourth edition continues the tradition bond portfolios date information about the bond marRet and the tools for managing Frank J, Fabozzi a ~x nen ¬ roe APTERI Introduction Learning Objectives After reading this chapter you will understand: H@ the fundamental features of bonds M@ the types of issuers M@ the importance of the term to maturity of a bond Mf floating-rate and inverse-floating-rate securities @ what is meant by a bond with an embedded option and the effect of an embedded option on a bond’s cash flow M@ the various types of embedded options @ convertible bonds Mf the types of risks faced by investors in fixed-income securities ™@ ụ xvi the various ways of classifying financial innovation A bond is a debt instrument requiring the issuer (also called the debtor or borrower) to repay to the lender/investor the amount borrowed plus interest over a specified period of time A typical (“plain vanilla”) bond issued in the United States specifies (1) a fixed date when the amount borrowed (the principal) is due, and (2) the contractual amount of interest, which typically is paid every six months The date on which the principal is required to be repaid is called the maturity date Assuming that the issuer does not default or redeem the issue prior to the maturity date, an investor holding this bond until the maturity date is assured of a known cash flow pattern For a variety of reasons to be discussed later in this chapter, the 1980s saw the development of a wide range of bond structures In the residential mortgage market particularly, new types of mortgage designs were introduced The practice of pooling of individual mortgages to form mortgage pass-through securities grew dramatically Using the basic instruments in the mortgage market (mortgages and mortgage pass-through securities), issuers created derivative instruments such as collateralized mortgage obligations and stripped mortgagebacked securities that met specific investment needs of a broadening range of institutional investors cy ¬ - i CHAPTERT ¬ ˆ bet Introduction SECTORS OF THE U.S BOND MARKET : ences Rattan sect) — The U.S bond market is the largest bond market in the world The market is divided into six sectors: U.S Treasury sector, agency sector, municipal sector, corporate sector, asset-backed securities, and mortgage sector The Treasury sector includes securi ties issued by the U.S government These securities include Treasury bills, notes, and bonds The U.S Treasury is the largest issuer of securities in the world This sector plays a key role in the valuation of securities and the determination of interest rates throughout the world | The agency sector includes securities issued by federally related institutions and government sponsored enterprises The distinction between these issuers is described in Chapter The securities issued are not backed by any collateral and are referred to as agency debenture securities This sector is the smallest sector of the bond market The municipal sector is where state and local governments and their authorities raise funds The two major sectors within the municipal sector are general obligation sector and the revenue sector Bonds issued in this sector typically are exempt from federal income taxes Consequently, the municipal sector is commonly referred to as the tax-exempt sector The corporate sector includes securities issued by U.S corporations and non-U.S corporations issued in the United States The latter securities are referred to as Yankee bonds Issuers in the corporate sector issue bonds, medium-term notes, structured notes, and commercial paper The corporate sector is divided into the investment grade and noninvestment grade sectors ; ; An alternative to the corporate sector where a corporate issuer can raise funds is in the asset-backed securities sector In this sector, a corporate issuer pools loans or receivables and uses the pool of assets as collateral for the issuance of a security The various types of asset-backed securities are described in Chapter 13 The mortgage sector is the sector where securities are backed by mortgage loans These are loans obtained by borrowers in order to purchase residential property or an entity to purchase commercial property Organizations that have classified bond sectors have defined the mortgage sector in different ways For example, the organizations that have created bond indexes include in the mortgage sector only mortgagebacked securities issued by a federally related institution or a government sponsored enterprise Mortgage-backed securities issued by corporate entities are often classified as asset-backed securities Mortgage loans and mortgage-backed securities are the subject of Chapters 11 and 12 TỐ Non-U.S bond markets include the Eurobond market and othey national bond markets We discuss these markets in Chapter OVERVIEW OF BOND FEATURES In this section we provide an overview of some important features of bonds A more detailed treatment of these features is presented in later chaptéets The bond indenture is the contract between the issuer and the bondholder, which sets forth all the obligations of the issuer ——— ob Lee ed ne] ae CHAPTER | “introduction Type of Issuer A key feature of a bond is the nature of the issuer There are three issuers of bonds: the federal government and its agencies, municipal governments, and corporations (domestic and foreign) Within the municipal and corporate bond markets, there is a wide range of issuers, each with different abilities to satisfy their contractual obligation to lenders Term to Maturity The term to maturity of a bond is the number of years over which the issuer has promised to meet the conditions of the obligation The maturity of a bond refers to the date that the debt will cease to exist, at which time the issuer will redeem the bond by paying the principal The practice in the bond market, however; is to refer to the term to maturity of a bond as simply its maturity or term As we explain subsequently, there may be provisions in the indenture that allow either the issuer or bondholder to alter a bond’s term to maturity Generally, bonds with a maturity of between one and five years are considered short term Bonds with a maturity between five and 12 years are viewed as intermediate-term, and long-term bonds are those with a maturity of more than 12 years There are three reasons why the term to maturity of a bond is important The most obvious is that it indicates the time period over which the holder of the bond can expect to receive the coupon payments and the number of years before the principal will be paid in full The second reason that term to maturity is important is that the yield on a bond depends on it As explained in Chapter 5, the shape of the yield curve determines how term to maturity affects the yield Finally, the price of a bond will fluctuate over its life as yields in the market change As demonstrated in Chapter 4, the volatility of a bond’s price is dependent on its maturity More specifically, with all other factors constant, the longer the maturity of a bond, the greater the price volatility resulting from a change in market yields Principal and Coupon Rate The principal value (or simply principal) of a bond is the amount that the issuer agrees to repay the bondholder at the maturity date This amount is also referred to as the redemption value, maturity value, par value, or face value The coupon rate, also called the nominal rate, is the interest rate that the issuer agrees to pay each year The annual amount of the interest payment made to owners during the term of the bond is called the coupon The coupon rate multiplied by the principal of the bond provides the dollar amount of the coupon For example, a bond ‘with an 8% coupon rate and a principal of $1,000 will pay annual interest of $80 In the United States and Japan, the usual practice is for the issuer to pay the coupon in two semiannual installments For bonds issued in European bond markets or the Eurobond market, coupon payments are made only once per year Note that all bonds make periodic coupon payments, except for one type that makes none These bonds, called zero-coupon bonds, made their debut in the U.S bond market in the early 1980s The holder of a zero-coupon bond realizes interest by buying the bond substantially below its principal value Interest is then paid at the maturity date, with the exact amount being the difference between the principal value Led ... Mortgage loans and mortgage-backed securities are the subject of Chapters 11 and 12 TỐ Non-U.S bond markets include the Eurobond market and othey national bond markets We discuss these markets in... Carlo Simulation Methodology Total Return Analysis 366 590 570 534 t xiii Preface to the Fourth Edition ụ i The first edition of Bond Markets, Analysis and Strategies was published in 1989 The objective... Government Bond Markets Emerging Market Bonds 190 191 Non-U:S Bonds Sovereign Bond Ratings WAC and WAM 231 235 Collateralized Mortgage Obligations Stripped Mortgage-Backed Securities 178 Types and Features