The handbook of fixed income securities eighth edition

Features and New Tools Managing THE for Analyzing, Fixed Income Valuing, Instruments HANDBOOK OF FIXED INCOME SECURITIES EIGHTH EDITION EDITED Frank PROFESSOR OF J FINANCE WITH BY Fabozzi EDHEC STEVEN V BUSINESS MANN SCHOOL THE HANDBOOK FIXED OF INCOME SECURITIES Eighth Edition FRANK J FABOZZI, PH.D., CFA, CPA Editor With the assistance of STEVEN V MANN, Ph.D Mc Graw Hill New York Chicago Mexico City San Francisco Milan Singapore Lisbon New Delhi Sydney London San Juan Toronto Madrid Seoul The McGraw-Hill Companies Copyright © 2012, 2005, 2001, 1997, 1995, 1991, 1987, 1983 by The McGraw-Hill Companies, Inc All rights reserved Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher ISBN: 978-0-07-176847-4 MH1D: 0-07-176847-5 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-176846-7, MHID: 0-07-176846-7 All trademarks are trademarks of their respective owners Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark Where such designations appear in this book, they have been printed with initial caps McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs To contact a representative please e-mail us at bulksales@mcgraw-hill.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, securities trading, or other professional services If legal advice or other expert assistance is required, the services of a competent professional person should be sought —From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc ("McGrawHill") and its licensors reserve all rights in and to the work Use of this work is subject to these terms Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill's prior consent You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited Your right to use the work may be terminated if you fail to comply with these terms THE WORK IS PROVIDED "AS IS." McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE McGraw-Hill and its licensors not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom McGraw-Hill has no responsibility for the content of any information accessed through the work Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise CONTENTS © Preface xxiii Acknowledgments Contributors xxvi xxvii PART ONE BACKGROUND Chapter Overview of the Types and Features of Fixed Income Securities Frank J Fabozzi, Michael G Ferri, and Steven V Mann Bonds Preferred Stock 15 Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Asset-Backed Securities Covered Bonds Key Points 16 17 17 18 18 Chapter Risks Associated with Investing in Fixed Income Securities Ravi F Dattatreya, Frank J Fabozzi, and Sergio M Focardi Interest-Rate Risk Reinvestment Risk 22 23 Call/Prepayment Risk Credit Risk 24 25 Inflation, or Purchasing-Power, Risk Liquidity Risk 27 Exchange-Rate, or Currency, Risk Volatility Risk 27 28 29 Political or Legal Risk 29 Hi 21 iv Contents Event Risk 30 Sector Risk 30 Other Risks 30 Statistical Measures of Portfolio Risk: Standard Deviation, Skewness, and Kurtosis Tracking Error Risk Key Points 30 31 32 Chapter Bond Market Indexes 33 Frank K Reilly and David J Wright Uses of Bond Indexes 33 Building and Maintaining a Bond Index 35 Description of Alternative Bond Indexes 36 Risk/Return Characteristics Correlation Relationships Key Points 40 45 48 Chapter Electronic Trading for Fixed Income Markets 51 Marshall Nicholson Overall Bond Market Growth 51 The Rise of Electronic Trading 52 The Impact of Regulatory Requirements 55 Shift to a Fee-Based Broker-Dealer Revenue Model Universe of Electronic Trading Platforms Current Technologies 56 57 59 Market Data and the Aggregation of Fixed Income ECNs Retail-Fixed Income Market Participation Retail Access to Individual Bonds Fixed Income Pricing Key Points 61 62 63 66 67 Chapter Macro-Economic Dynamics and the Corporate Bond Market Steven I Dym The Macro-Economy Corporate Profits Interest Rates 69 73 73 The Central Bank 74 Important Considerations The Yield Curve The Spread Curve 77 80 75 69 Contents v Cyclicality of Credit Spreads Stagflation 81 83 Correlation and Capital Structure Key Points 84 87 Chapter Bond Pricing, Yield Measures, and Total Return 89 Frank J Fabozzi Bond Pricing 89 Conventional Yield Measures Total Return Analysis Key Points 102 113 120 Chapter Measuring Interest-Rate Risk 123 Frank J Fabozzi, Gerald W Buetow, Jr., Robert R Johnson, and Brian J Henderson The Full-Valuation Approach 124 Price Volatility Characteristics of Bonds Duration 128 137 Modified Duration versus Effective Duration Convexity 143 149 Price Value of a Basis Point 164 The Importance of Yield Volatility Key Points 165 166 Chapter The Structure of Interest Rates 169 Frank J Fabozzi The Base Interest Rate Risk Premium 169 170 The Term Structure of Interest Rates Key Points 173 189 PART TWO GOVERNMENT SECURITIES AND CORPORATE DEBT OBLIGATIONS Chapter U.S Treasury Securities 193 Michael J Fleming and Frank J Fabozzi Types of Securities The Primary Market 194 195 vi Contents The Secondary Market 199 Zero-Coupon Treasury Securities Acknowledgments Key Points 204 205 205 Chapter 10 Agency Debt Securities 207 Mark O Cabana and Frank J Fabozzi Agency Debt Market Overview Types of Agency Debt Securities The Primary Market 211 214 The Secondary Market 215 Agency Debt Issuance Issuing Agencies 208 215 217 Large, Active Issuers 218 Smaller, Active Issuers 220 Nonactive Issuers and Recently Retired GSEs Acknowledgments Key Points 221 223 223 Chapter 11 Municipal Bonds 225 Sylvan G Feldstein, Frank J Fabozzi, Alexander Grant, and David Ratner Features of Municipal Securities Types of Municipal Obligations 227 229 The Commercial Credit Rating of Municipal Bonds Municipal Bond Insurance Valuation Methods 238 244 245 Tax Provisions Affecting Municipals 246 Yield Relationships within the Municipal Bond Market Primary and Secondary Markets Bond Indexes 251 253 Official Statement 254 Regulation of the Municipal Securities Market Key Points 249 254 257 Chapter 12 Corporate Bonds 259 Frank J Fabozzi, Steven V Mann, and Adam B Cohen The Corporate Trustee 260 Some Bond Fundamentals Security for Bonds 261 264 Alternative Mechanisms to Retire Debt before Maturity 270 Contents vii Credit Risk 276 Event Risk 279 High-Yield Bonds 281 Default Rates and Recovery Rates Medium-Term Notes Key Points 283 285 286 Chapter 13 Leveraged Loans 289 Stephen J Antczak, Frank J Fahozzi, and Jung Lee Syndicated Bank Loans Loan Structure Loan Terms 291 292 Recovery Rates 294 Secondary Market Key Points 290 295 297 Chapter 14 Convertible Securities and Their Investment Application Jonathan L Home and Chris P Dialynas Basic Characteristics of Convertible Securities and Key Terms Overview of Convertible Bond Valuation and Risk Metrics Primary Investors in Convertible Bonds 309 Motivations behind the Issuance of Convertible Securities Key Points 314 Chapter 15 Structured Notes and Credit-Linked Notes John D Finnerty and Rachael W Park Structured Notes 316 Credit-Linked Notes Key Points 329 336 Chapter 16 Private Money Market Instruments Frank J Fahozzi and Steven V Mann Commercial Paper 337 Bankers Acceptances 340 Large-Denomination Negotiable CDs Repurchase Agreements Federal Funds Key Points 350 351 345 304 343 337 315 312 299 299 viii Contents Chapter 17 Floating-Rate Securities 353 Frank J Fabozzi and Steven V Mann General Features of Floaters and Major Product Types Call and Put Provisions Spread Measures 356 357 Price Volatility Characteristics of Floaters Portfolio Strategies Key Points 354 358 362 363 Chapter 18 Inflation-Linked Bonds 365 John B Brynjolfsson Mechanics and Measurement Marketplace 367 373 Valuation and Performance Dynamics Investors Issuers 374 375 380 Other Issues Key Points 382 383 Chapter 19 International Bond Markets and Instruments 385 Karthik Ramanathan Overview and Scope of International Bond Markets The Instruments: Domestic, Euro, and Foreign Dollar-Denominated International Bonds 385 387 389 Non-Dollar-Denominated Debt International Bonds 397 International Fixed Income and Understanding Currency Risk Key Points 401 406 Chapter 20 Emerging Markets Debt 409 Jane Sachar Braiier The Debt Universe 409 Emerging Markets Debt Performance History Brady Bonds 413 417 Defaults, Exchanges, Restructurings,Workouts, and Litigation Derivatives 432 Credit-Linked Notes (CLNs) Valuation Methods Conclusion 437 435 434 422 Contents ix Collateralized Brady Bonds 437 Noncollateralized Brady Bonds 438 Chapter 21 Fixed Income Exchange Traded Funds 439 Matthew Tucker and Stephen Laipply Investment Characteristics 440 Fixed Income ETF Management 447 Fixed Income ETF Characteristics and Mechanics 448 Trading Behavior: A Closer Look at Premiums and Discounts Key Points 453 456 Chapter 22 Covered Bonds 459 Vinod Kothari Covered Bonds: From Europe to the Rest of the World Understanding Covered Bonds Structure of Covered Bonds 460 461 Cover Assets and Credit Enhancements 466 Asset/Liability Mismatches and Liquidity Risk Ratings of Covered Bonds 467 469 Covered Bonds and Securitization Accounting for Covered Bonds Key Points 460 469 472 472 Chapter 23 Nonconvertible Preferred Stock 475 Steven V Mann Preferred Stock Issuance Trust Preferred 476 478 Preferred Stock Ratings 478 Tax Treatment of Dividends Key Points 479 480 PART THREE SECURITIZED PRODUCTS Chapter 24 An Overview of Mortgages and the Mortgage Market Anand K Bhattacharya and William S Berliner Product Definition and Terms Mechanics of Mortgage Loans The Mortgage Industry 492 484 488 483 1796 Index Portfolio management {Cont.)\ cell-based analysis for, 1163-1164 factor exposure reports for, 1083 factor exposure reports for, 1083 idiosyncratic risk and, 1094-1096 market structure and exposure contributions issuer-specific risk and, 1096-1098 issue-specific risk and, 1094-1096 long duration and, 1070 to, 1071-1073 multifactor risk modeling for analyzing, 1060-1062, 1164-1166 with long/short credit strategy, 1346-1347 summary report for, 1077-1083 macro views in, 1310-1311 yield curve shifts and management market structure and exposure for, 1071-1073 of, 813-816 POs See Principal-only securities multifactor risk modeling and, 1059-1060 Positive carry, 1400-1401 performance attribution and, 1635-1636, Positive convexity, 134 1647-1667 PPN See Principal-protected structured note portable alpha strategies for, 1406-1408 PPPs See Public-private partnerships prepayment risk and, 1091-1094 Predefault events, 1035-1036 quantitative tools for, 1180-1181 Predefault market value, 1037-1038 risk budgeting for, 1059, 1070-1071, Preferred dividend, 928 1178-1179 scenario analysis for, 1064-1066, 1098-1099 success measured for, 1145-1148 Preferred Equity Redemption Cumulative Stock (PERCS), 16 Preferred stock summary report for, 1077-1083 advantages of, 476 swap spread risk and, 1086-1088 contingent voting with, 475 synthetic securities for yield enhancement in, cumulative v^ noncumulative, 15, 475 1405-1406 debt compared to, 15-16 TEV used by, 1071 definition of, 15, 475 volatility and, 1074-1077, 1521-1523 issuance of, 476-478 Portfolio outperformance rating agencies for, 478-479 from allocation methods, 1644 sinking-fund provisions in, 476 from common factors, 1644 tax considerations for, 15 components of, 1640-1642, 1666 tax treatment of, 479 compounding, 1735-1737 types of, 477—478 by currency, 1720-1721 from currency exposures, 1648-1649 Preferred Stock Purchase Agreements (PSPA), 209 with Excess Return Model, 1689, 1695 Preferred-habitat theory, 188-189 for fixed income securities, 1681-1682 Premium callable bonds, 1145 with Fully Analytical Model, 1698-1701 Premium collateral, 642 FX, 1650, 1714-1716, 1719-1728 Premium coupon loans, 528 goals of, 1647 Premium leg from implied volatility exposure, 1695-1697 cash flow on, 1587 of CDS, 1548-1549, 1576-1578 Intra-Day Trading and, 1737-1738 ofCDX, 1564-1565 from management of local markets, valuation of, 1576-1578 1652-1653, 1666 Premium makewhole, 905 requirements for, 1636-1637 Premium over parity, 922 from spread, 1698-1701 Prepayment risk, 17 total, 1648 agency MBS and, 1092-1093 with Total Return Model, 1683, 1685 fixed income multifactor risk modeling and, unsettled positions and, 1738 from yield curve exposure, 1653-1658, 1689-1695 Portfolio risk 1055-1056, 1091-1094 MBS and, 24 mortgages and, 502-505, 1137 with nonagency RMBS, 663, 677-678 analysis approaches for, 1070-1071 portfolio management and, 1091-1094 benchmarks vs., 1152 Z bonds and, 603 Index 1797 Prepayment surprise outperformance, 1701 Prepayments global credit portfolio management and, 1191-1192 aging effect and, 527-528 market-structure dynamics and, 1192-1193 burnout effect and, 528-529 municipal bonds in, 251-252 CMBS and, 686 product structure and, 1193 conventions of, 523-525 for Treasury securities, 195-199 default and, 525-526 housing market and, 530 interest rate effect on, 526 Principal, 1746 of bond, 5-9 Principal component analysis (PCA), 1054 involuntary, 507 on LIBOR rates, 822 of MBS, 523 risk factors regrouped through, 1109-1111 models for, 530-531 for yield curve shifts, 805-813 of mortgages, 503-505 Principal component dollar durations, 1110-1111 OAS, 562 Principal strips, 204 seasonality and, 530 Principal waterfall, 741 SMBS and, 633-637, 641 Principal-only securities (POs) sources of, 525-530 CMOs collateralized by, 633 support bonds and, 615-616 SMBS and, 631-632 voluntary, 507 tranches and, 555-558, 666 yield curve and, 530 Z bond speed of, 595-596 Principal-protected structured note (PPN), 328-329 Prerefunding, municipal bonds, 11-12, 234-235 Private bonds, 976 Present value, 1745-1746, 1754-1755, Private placement, 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 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 Priaulet, Philippe, 1101 of CDS, 1549-1550, 1578 Price, 1755, 1759 ofCDX, 1565 Price risk, 362 valuation of, 1578 Price value of a basis point (PVBP), 164-165, 1410 Price volatility Protective put-buying strategy with futures options, 1433-1437 for hedging, 1428-1429 of bonds with embedded options, 132-135 Proxy hedging, 1267 of callable bonds, 132-134 Proxy portfolios, 1169 coupon rate and, PSA See Public Securities Association in emerging markets, 415 PSA model, 504-505 of floating-rate securities, 358-361 PSPA See Preferred Stock Purchase of inverse floaters, 361 Agreements of option-free bonds, 128-130 Public power revenue bonds, 232, 1016-1017 of putable bonds, 134-135 Public Securities Association (PSA), 524 yield level and, 165-166 Price/yield relationship of callable bond, 158 See also Bond Market Association Public-private partnerships (PPPs), 232, 1017-1018 of option-free bonds, 94-95, 129, 135 Purchasing-power risk, 27 of putable bond, 161 Pure bond indexing, 1123-1124 See also Bond Primary government securities dealers, 196 Primary market agency securities in, 214-215 index portfolios enhanced, 1124-1125 Pure expectations theory, 185-188, 750 analysis, 1191-1193 convexity bias and, 755 fixed income ETFs in, 449-450 return-to-maturity expectations form of, 188 1798 Index Pure revenue bonds, 1004 Real yield, 763, 1262 Pure yield pickup swaps, 116 the Taylor rule for, 375 Put, 1501 of TIPS, 369 Put extension sweetener, 940 Realized BRP, 763 Put options, 1371 Rebonato, Riccardo, 817 change of control, 940-941 Recidivism, 674-675 for convertible bonds, 301 Records, 1744 for convertible securities, Recoveries, 718 940-941 profit/loss graph for, 1503 Putable bonds Recovery rates of corporate bonds, 285 of leveraged loans, 294-296 convexity of, 159-161 Recursive allocation, 1641-1642 duration of, 159-161 Reduced-form credit model, 1026 hard vi' soft, 13, 906 calibration of, 1039 price volatility of, 134-135 default correlation and, 1038-1039 price/yield relationship of, 161 default intensity and, 1036-1037 valuation of, 870-871 valuation and, 1037-1038 Putable structures, 1207-1208 REFCorp See Resolution Funding Corporation Put-call parity, 1503-1504, 1508 Reference Bill program, 211 PVBP See Price value of a basis point Reference debt security, 902 Reference Notes program, 211, 214 Quality spread, 170 Reference obligation, 332 analysis, 1203 Refunded bonds, 234-235 crossover, 234 Rachlin, Ellen, 1331 Refunding, 10 Railroad rolling stock, 267-268 Registered bonds, 5, 262 Rainbow conversion option, 901 Regulation 144A, 395 Ramamurthy, Shrikant, 1409 Reilly, Frank K., 33 Ramanathan, Karthik, 385, 1247 Reinvestment risk, 23-24, 185 Range floating-rate notes, 322-323 coupon rate and, 105 Range note, 7, 355 yield-to-maturity and, 105 valuation of, 873, 874 REITs See Real estate investment trusts RANs See Revenue anticipation notes Relative market value, 36 Rate basis, 1420 Relative value analysis Rate shocks, 142-143 CDS trends in, 1234-1235 Rate-anticipation swaps, 117 credit analysis and, 1186-1190, 1227-1235 Rating agencies, 25 credit comparable analysis in, 1228-1230 for covered bonds, 469 duration in, 1235 credit card ABS criteria of, 721-723 quadrant analysis in, 1228, 1230-1232 nonagency MBS downgrades with, 1320 risk/reward in, 1227-1228 for preferred stock, 478-479 scenario analysis for, 1232-1233 Rating migration table, 277 stock prices for, 1233-1234 Rating outlook, 25 trading history in, 1233 Rating transition tables, 26, 277, 279 Remarketed preferred stock, 478 Rating watch, 25 REMIC See Real Estate Mortgage Ratner, David, 225, 995 Real duration, 371 1LB management with, 378-379 Real estate investment trusts (REITs), 648, 970, 975 Real Estate Mortgage Investment Conduit (REMIC), 701 Real frame of reference, 368 Investment Conduit Repo margin, 1357 Repo market, 349-350 emerging markets debt and, 435 Repo rate, 346, 1356 determinants of, 349, 1359 formula for, 1356-1357 implied (break-even), 1403 Index 1799 Republic (Plato), 1332 asset-backed, 1000 Repurchase agreements charter school, 230-231, 1008 credit risk with, 347-349, 1357-1359 definition of, 345-346, 1355-1356 continuing care retirement community, 231, 1008 HIC repo and, 1358-1359 dedicated tax-backed, 235, 1000, 1009 margin in, 347-348 definition of, security lending compared to, 1364-1365 flow of funds structure and, 998-999 transaction formula for, 346 higher education, 231, 1009 Repurchase date, 1356 highway, 1009-1011 Repurchase price, 1356 hospital, 231, 1011-1012 Request for quote systems, 59 housing, 1012-1015 Required margin, 362 industrial, 1015 Required yield industrial development and pollution bond pricing and, 90-91, 94-95 bond pricing relationship with and coupon rate and, 95-96 control, 231 issuer scrutiny for, 1002 land-secured "dirt" bonds, 231, 1016 Reserve Bank of New Zealand, 821 lease-rental, 235, 1016 Reset strike cap/floor, 1527 legal opinion on, 997-998 Residential mortgage loans negative trends for, 1020-1021 analysis of, 1322-1323 new financing techniques for, 1000 servicing of, 1323-1324 PPPs and, 232, 1017-1018 Residential mortgage-backed security (RMBS), public power, 232, 1016-1017 16-17 See also Agency RMBS; revenue claims priority for, 999 Nonagency RMBS security limits for, 998 Residual Option Certificates (ROCs), 238 tobacco, 233, 1018 Residual Option Longs (ROLs), 238 toll road and gas tax, 233, 1009-1011 Residuals, 1673 tribal casino, 233, 1018 Resolution Funding Corporation (REFCorp), 222 types of, 230-233 Resource recovery revenue bonds, 232 user-charge covenants and, 999 Rest date, 1449 water and sewer, 233, 1018-1020 Resting order, 1380 Reverse cash and carry trade, 1397 Restricted Payments covenant, 973-974, 1223 Reverse floaters, 355 See also Inverse floaters Restructuring, 282 Reverse market flex, 291 CDS triggered from, 1559-1560 Reverse repo, 520, 1357 credit events and, 1551-1553 Reverse TACs modified, 1552-1553 life volatility of, 622-624 modihed-modihed, 1552-1553 support bonds and, 621-624 no, 1553 Reversing in securities, 347 Retail channel, 492 Reversing out securities, 347 Retail fixed income investors Revolving line of credit, 291 access for, 63-66 Rho, 306 market participation of, 62-63 Richard, Scott F, 881 Retail investors, in CMOs, 566 RIG See Rolling interest guarantee Retail Prices Index (RP1), Risk See also Basis risk; Counterparty risk; Return on equity, 966 Credit risk; Curve risk; Default risk; Return splitting Event risk; Idiosyncratic risk; Interest-rate for fixed income securities, 1672-1674, 1679-1680 FX, 1712-1713 risk; Issuer-specific risk; Liquidity risk; Portfolio risk; Prepayment risk; Tail risk of agency securities, 207 Revenue anticipation notes (RANs), 236 assessment checklist, 1223-1225 Revenue bonds attribution, 1061 additional-bonds test for, 999-1000, 1020 airport, 230, 1007-1008 bond portfolio management and, 22, 1124, 1126 1800 Index Risk (Cont): systemic, 327, 1088, 1164, 1165 of call provision, 9-10, 24 tax, 29 cap, 136, 360, 362 tax-policy, 1057 CDS management of, 1583-1589 TIPS strategies for, 378 CDX management of, 1591 tracking error, 31-32, 1403 contraction, 24 tranches and, 881 convertible bond valuation factors of, types of, 21-22 306-308 country, 930 covenant, 1220 credit default, 277 curvature, 816 volatility, 29, 1056 yield curve, 23 Risk budgeting, 1059, 1070-1071 based on skill, 1178-1179 Risk factors deal call, 563 with bond index portfolios, 1133-1138 dollar rolls and, 1362 classification of, 1101 downgrade, 25-26 matching, 1126 duration, 23, 902 mismatches, 1125 exchange-rate, 28 multiple, 1108-1109 extension, 24 PCA regrouping, 1109-1111 fixed income transitions and, 1280 principal component dollar durations and, fixed income transitions and cost tradeoff with, 1286 1110-1111 in term structure of interest rates, 1101-1102 funded hedges and trade-specific, 1629-1630 Risk modeling See Multifactor risk modeling funded hedges v^ unfunded hedges, Risk premium, 170 1627-1629 Risk-based pricing, 501-502 high-yield bond portfolio control of, 1245 Riskless arbitrage opportunities, 756 high-yield bond portfolio tolerance of, RJR Nabisco LBO, 280-281 1240-1241 RMBS See Residential mortgage-backed security hump, 816 ROCs See Residual Option Certificates implied volatility, 1056 The Role of Monetary Policy (Friedman), inflation, 27, 814, 1057 interest-rate futures contracts controlling, 1409 international bond portfolio limits on, 1255 1332, 1334 Roll rate analysis, for nonagency RMBS, 678-679 international bond tolerance with, 1249-1250 Roller-coaster swaps, 1471 legal, 29 Rolling interest guarantee (RIG), 435, 438 level, 816 Rolling yield, 763, 766, 769, 773 market-value, 1131 as expected return measure component, 778-779 municipal bonds and, 227 forward rates interpretation of, 792-793 nonagency RMBS layering, 657 ROLs See Residual Option Longs nonagency RMBS metrics of, 675, 677 Rosenberg, Barr, 1304 nonsystemic, 1165 Rosenfeld, Eric, 1034-1035 political, 29 RPI See Retail Prices Index price, 362 Ru, Peter, 881 purchasing-power, 27 Rule of de minimus, 247 reinvestment, 23-24, 105, 185 Russia, defaulted debt characteristics, 424-425, sector, 30 slope, 816 427-428 Ryan Labs, 36-38 sovereign, 345, 1622, 1623 sovereign credit, 1602-1603 Sale/Leaseback covenant, 973 spread, 147, 1094 Sallie Mae See Student Loan Marketing Standard & Poor's analysis of, 968-969 Association of structured notes, 325-327 Salomon Brothers Inc., 196 of student loans, 735-736 Samurai market, 399 swap spread, 1086-1088 Sarchese, Nicholas R., 1213 Index 1801 SCDOs See Synthetic collateralized debt obligations Scenario analysis, 784-788 electronic trading regulations of, 55-56 material event disclosure of, 256 Regulation 144A, 395 flexible, 1181 Securities held by portfolio, 1746 history-based, 1166 Securities in index, 1755, 1759 maximum-likelihood, 1166 Securities Industry and Financial Markets multifactor risk modeling as basis for, 1064-1066 for portfolio management, 1064-1066, 1098-1099 Association (SIFMA), 51-52 pool restrictions of, 522-523 Securitization See also Credit card securitization covered bonds compared to, 469-471 for relative value analysis, 1232-1233 flow chart for, 728 for total return, 116-119 SPY in, 727-728 Scenario generation model, 1166 Security borrower, 1363 Scholes, Myron, 928, 932, 1026, 1035 Security lender, 1363 Schwartz, Eduardo J., 932 Security lending Screw clause, 901 definition of, 1363 SDE See Stochastic differential equation repurchase agreements compared to, Seaport revenue bonds, 232 Seasonality, 530, 1200 1364-1365 Security selection SEC See Securities and Exchange Commission Euro breakdown for, 1664-1665, 1668 Secondary market leverage from derivative contracts and out- agency securities in, 215 performance of, 1730 CMOs in, 539 outperformance, 1655, 1659 commercial paper in, 339 in performance attribution, 1640-1642 Fed in, 200-201 U.S dollar breakdown for, 1661-1663 fixed income ETFs in, 450-452 Sell stop order, 1380-1381 leveraged loans on, 296-297 Selling collateral, 347, 350 mortgages history in, 513-515 Senior security, 16 municipal bonds in, 251-253 senior/subordination structure (senior/sub), for Treasury securities, 199-204 Yankee bonds in, 392-393 Secondary trade rationales basis trades, 1198 664-666 Separate Trading of Registered Interest and Principal Securities (STRIPS), 6, 204 See also Zero-coupon bonds cash flow reinvestment, 1198 Sequential CMOs, 540-543, 594 credit-defense trades, 1195-1196 Sequential payments, 663 credit-upside trades, 1195 Serial bonds, 5, 228 new-issue swaps, 1196 Servicers, 493-494 sector-rotation trades, 1196 Setting date, 1449 structure trades, 1197 Settlement date, 1746 yield curve adjustment trades, 1197 Settlement date holdings, 1746-1747 yield-spread pickup trades, 1194-1195 Settlement money, 1356 Sector risk, 30 Sewer revenue bonds, 232, 1018-1020 Sector rotation strategies, 1210-1211 SFR See Swap fixed rate Sector-level spread, 1699-1701 Shared enhancement series, 711 Sector/quality enhancements, 1143-1145 Sharpe ratio, 1060, 1253 Sector-rotation trades, 1196 Securities Act of 1933, 254 in emerging markets, 415 Shenkman, Mark R., 1213 amendment of 1975, 255 Short hedge, 1414 Rule 144A of, 903 Short-term bonds, Securities and Exchange Act of 1934, 254, 1362 Short-term forward rates, 184-185 Securities and Exchange Commission (SEC) Siegel, Jeremy, 369 bond disclosure rule of, 255 creation of, 254 SIFMA See Securities Industry and Financial Markets Association 1802 Index "Silent seconds," 654-655 Spot rate, 175, 748, 928 Simple margin, 357 calculating, 764-765 Simulation, 883-887 definition of, 747 Single look options, 1530 forward rates and, 765-767 Single monthly mortality (SMM), 503, 524 short-term forward rates relationship with, Single-dealer client systems, 58 Single-family mortgage revenue bonds, 232 184-185 Treasury securities determined by, 179-181 Single-price auctions, 195 Spot starting, 1530 Sinking-fund provisions, Spot-rate curve, 175 accelerated, 274 advantages of, 12, 274 forward rates and, 792 Spread analysis for corporate bonds, 273-275 alternative spread measures in, 1201-1202 optional acceleration feature of, 12-13 global credit portfolio management and, in preferred stock, 476 specific vs nonspecific, 275 1200-1204 mean-reversion analysis, 1202-1203 Sinking-fund structures, 1206-1207 percent yield, 1203-1204 Skewness, 31 quality, 1203 Slope duration, 814-815 spread tools for, 1202 Slope risk, 816 swap spreads in, 1201-1202 Slope shifts, 803-804 treasury bonds and, 810 SMBS See Stripped mortgage-backed securities SMM See Single monthly mortality Soft bullet maturity, 467 Spread change return, 1678-1679 Spread curve, 80 Spread duration, 147, 361 credit-spread risk measured with, 279, 1291-1292 Soft put, 13, 906 Spread DV01, 1584-1587 SONIA See Sterling overnight interest rate Spread for life measure, 357 average swaps Spread measures, 357-358 Sovereign CDS market, 1338-1339 Spread over swaps, 435 Sovereign credit risk, 1602-1603 Spread products, 147 Sovereign debt restructurings Spread risk, 147 See also Credit risk; CACs and, 432 English law on, 432 Prepayment risk sources of, 1094 global implications of, 427, 429 Spread trades, 1517-1518 holdouts in, 431-432 Spread volatility immunity in, 430 DTS and, 1295-1298 New York law on, 432 predicting, 1298-1302 no bankruptcy court in, 429-430 short-term v^ long-term forecasts of, provision changes for, 431-432 Sovereign defaults, 902, 1337 funded hedges and, 1620-1625 Sovereign risk, 345 1299-1300 SPY See Special-purpose vehicle Staal, Arne D., 1049, 1069 Stagflation, 83-84 FTD hedge for, 1622, 1623 Stairway note, premium, 345 Standard & Poor's (S&P) S&P See Standard & Poor's corporate bond ratings of, 278 Special-purpose entity (SPE), 461-462 municipal bond ratings of, 242-243 See also Covered bonds Special-purpose vehicle (SPY) CLN structure as, 330-331 in securitization, 727-728 risk analysis of, 968-969 S&P 500, 1594, 1600-1605, 1607, 1609-1614, 1617-1619 Standard deviation, 30-31 Specified pool trading, 521 Standard undergraduate macroeconomics, 802 Split-rated issuers, 975 Standby commitments, 1389 Sports complex and convention center revenue Stated conversion price, 13 bonds, 233 Static spread, 882-883 Index 1803 Step-down date, 667-668 Stepped-spread floaters, 355 global credit portfolio management and, 1204-1208 Step-up bonds, 282 putable structures, 1207-1208 Step-up notes, sinking-fund structures, 1206-1207 Sterling overnight interest rate average swaps (SONIA), 1473 Structural credit model calibration of, 1034-1035 Stochastic differential equation (SDE), 825 classical approach to, 1026-1028 Stock market downturns credit premium and, 1033-1034 catalysts for, 1596-1597 dependent defaults in, 1031-1033 correlations with, 1602 first-passage approach to, 1028-1031 definition of, 1601 future prediction with, 1035-1036 frequency of, 1600-1601 Structural subordination, 968-969 Stock market indexes, bond indexes vs., 35 Structure trades, 1197 Stop order, 1380-1381 Structured asset-backed bonds, 235 Stop-advance, 661 Structured covered bonds, 464-466 Stop-limit order, 1381 Structured notes, 14, 286 Stop-out yield, 195 characteristics of, 316-319 Story bond, 281 credit risk of, 325-326 "Story" disagreement, 1199 definition of, 315-316 STP See Straight Through Processing Euro-MTNs and, 320 Straddle, 1515-1516 investor benefits of, 327-328 Straddle pricing, cap/floor, 1535-1536 liquidity risk of, 326 Straight Through Processing (STP), 54 market risk of, 326 Straight-coupon bonds, 262 MTN issuer of, 317-318 Strangle, 1516-1517 PPN, 328-329 Stress testing, 128 risks of, 325-327 of credit card master trust, 724-725 Stressed conditions, 1052 Strike price, 1501-1502 selecting, 1434-1435 Strike rate, 1477, 1499-1500 Stripped mortgage-backed securities (SMBS) systemic risk of, 327 types of, 320-325 Structured POs, 558 Structured public convertibles, 915 Student Loan Marketing Association (Sallie Mae), 217, 222 cash flows for, 633-634 Student loan revenue bonds, 233 characteristics of, 630 Student loans effective duration and convexity of, 638-640 deferment of, 734 Fannie Mae program of, 629, 631 -632 forbearance for, 734 Freddie Mac program for, 632 government guaranteed, 733-734 Ginnie Mae program of, 632-633 private, 734-735 investment characteristics of, 633-642 risks of, 735-736 IOs and POS in, 631-632 Sturhahn, Chris, 1635, 1671, 1711 market development for, 631 Subordination OAS and pricing of, 640-642 of CMBS, 693-694, 696-697 prepayments and, 633-637, 641 in credit card master trust, 720-721 price performance of, 636 of debenture bonds, 269 projected price behavior of, 638 structural, 968-969 types of, 630-631 Subprime loans, 488 Stripped spread, 420, 435 capital structure of, 668 Stripped yield, 420 delinquency of, 658, 660 STRIPS See Separate Trading of Registered nonagency RMBS impacted by crisis with, Interest and Principal Securities Structural analysis 645-646, 650-652 Subsidiary, 1382 bullet structures, 1205-1206 Subsidiary Debt covenant, 973 callable structures, 1206 Substitute payment, 1364 1804 Index Substitution swaps, 119 Syndicated loans, 290-291 Support bonds Synthetic collateralized debt obligations collars raised for, 617 (SCDOs), 335-336 creation of, 613 Synthetic securities, 1405-1406 layered PACs and, 624-627 System repo, 349-350 life variability of, 617-618, 627-628 Systemic return, 1051 lockouts and, 617 Systemic risk, 1164, 1165 PACs and, 546-547, 613-618 DTS and, 1088 PACs v.v TAC, 620-621 of structured notes, 327 prepayments and, 615-616 reverse TACs and, 621-624 TAC See Targeted amortization class TAC, 614, 618-621 Tactical allocations, 445 Surprise return, 1675 Tail risk, 1180 Survival curve, 1579-1581 catalysts for, 1596-1597 Svensson model, 1112-1113 frequency of, 1596 Swap fixed rate (SFR), 1479 hedging, 1604 Swap futures contracts, 1378-1379 overview of select, 1600-1604 Swap rate, calculation of, 1457, 1460, 1462-1463 recent focus on, 1593 Swap spread, 1201-1202 Takeover protection, 302, 941 definition of, 1468 Tangent line, 140-141 determinants of, 1468-1470 TANs See Tax anticipation notes Swap spread risk, 1086-1088 Target dollar duration, 1411-1413 Swap-based indexes, 1160-1161 Target price basis, 1420-1421 Swaps See also Interest-rate swaps Target rate basis, 1420-1421 accreting, 1471 amortizing, 1471 Targeted amortization class (TAC), 547-548, 602-603 basis, 1471-1472, 1495-1497 reverse, 621-624 bond, 116-119 schedule for, 618 constant-maturity, 1471 support bonds, 614, 618-621 Eonia, 1473 support PACs vs support, 620-621 fixed income ETFs compared to, 441^-42 Tax anticipation notes (TANs), 236 forward-start, 1472, 1486-1490 Tax Reform Act of 1986, 700 hedging, 286 Tax risk, 29 lattice models for valuation of, 1480-1486 Taxable equivalent yield, 119-120 LIB OR TED, 1495-1497 Tax-allocation bonds, 233 new-issue, 1196 Tax-backed bonds, issuer scrutiny for, off-market, 1472 1001-1002 overnight-index, 1472-1474 Tax-exempt market See Municipal bond market roller-coaster, 1471 Tax-policy risk, 1057 sterling overnight interest rate average, 1473 Taylor, John, 375 as total return investment, 1176-1177 Taylor expansion, second-order, 1106-1107 valuation of, 1462, 1464, 1468, 1498-1500 The Taylor Rule, 375 Swaptions, 1445, 1471, 1677 TEA prices See To-be-announced prices caps and floors vs., 1535, 1537-1538 TD See Termination date cumulative swap valuation lattice for, TED spread, 1495 See also L1BOR TED swaps 1491, 1494 Tender offers, 276 definition of, 1475 Tender option bond (TOB), 238 pay fixed, 1490, 1493 Tennessee Valley Authority (TVA), 207, strike rate and, 1477, 1499-1500 217, 221 time to expiration for, 1477 Term bonds, 5, 228 valuation of, 1490-1495 Term loans, 291 volatility and, 1476-1477 Term repo, 346, 1356 yield curve changes and, 1475-1476 Term spread, 763 Index 1805 Term structure factor models, 1101 Total return duration hedging, 1103-1107 arbitrage-free, 115 duration-convexity hedging, 1107-1108 calculating, 113-115 multiple risk factors in, 1108-1109 in high-yield market cyclical and non-cyclical Term structure of interest rates, 23, 171, 173 determinants of, 770-772 liquidity theory for, 188 sector, 2008, 1625 international bond portfolio components of, 1263-1265 market-segmentation theory of, 189 objections to, 114 preferred-habitat theory of, 188-189 scenario analysis for, 116-119 pure expectations theory for, 185-188 swaps as, 1176-1177 risk factors in, 1101-1102 shape of, 185-189 Total Return Model, 1681 asset allocation using, 1684-1688 Termination date (TD), 1557-1558 formula for, 1682 Term-to-maturity, portfolio outperformance breakdown using, Territorial bonds, 236 TEV See Tracking error volatility Theoretical spot-rate curve 1683, 1685 TRACE See Trade Reporting and Compliance Engine bootstrapping process for, 175-179 Tracking error risk, 31-32, 1403 definition of, 175 Tracking error volatility (TEV), 1059-1060 Theta, 1513 contributions to, 1075 Thrift CDs, 344 isolated, 1074, 1097 TIGRs See Treasury Investment Growth Receipts multifactor risk modeling and, 1165 Time return, 1675-1676 portfolio management using, 1071 Time value, 1505 TIPS See Treasury Inflation Protected Securities Trade date, 1449 holdings, 1747 TLGP See Treasury Liquidity Guarantee Program Trade rationales See Secondary trade rationales To repo, 347 Trade Reporting and Compliance Engine 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 (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 corporate developments in, 1237 cash flow analysis of, 560 default expectations in, 1239 CLO structure of, 738 economic outlook in, 1236 floating-rate securities and, 551-553 equity market trends in, 1237 hedging, 560 Fed policy in, 1236-1237 inverse floaters and, 553-555 to global credit portfolio management, 1188 investor goals and constraints with, to high-yield portfolio management, 1235-1239 559-560 IO/PO, 555-558, 666 interest rates forecast in, 1236-1237 loss allocation structure of, 1325-1326 liquidity in, 1238-1239 OAS analysis for, 560 market drivers and macro considerations PACquential bonds and, 548-549 for, 1236 path dependency sources in, 883-884 market yield and spread in, 1237-1238 risks of, 881 supply and demand in, 1238 senior, 664-665 Top-level spread, 1698-1699 TAC, 547-548, 602-603 Total adjusted margin, 357 types of, 539-546 Total debt, 960 VADM bonds and, 550-551 Total future dollars, 114 Z bonds and,549-550, 597-600 1806 Index Transition management, 444 See also Fixed income transitions case study of, 1288-1289 Treasury notes, 194 futures contracts, 1376 quoting conventions for, 203-204 focus of, 1277 Treasury portfolios, benchmarks and, 1157 history of, 1277-1278 Treasury securities Transunion, 494 bid-ask spreads for, 202-203 Treasury auctions, 195 common uses of, 193 reopenings for, 198 corporate bonds vs., 1143 schedule for, 197-198 coupon V6- discount, 194 Treasury bills, 194 debt buyback program for, 198-199 discount rate, 202 equivalent taxable yield and, 172 futures contracts, 1377 forward rates for, 181-183 quoting conventions for, 202-203 IDBs for, 200 Treasury bonds, 194 liquidity of, 173 curvature shifts and, 810 off-the-run issues of, 201 futures contracts, 1373, 1376, 1384-1385 on-the-run issues of, 201 parallel shifts in, 809 OTC market for, 1390 quoting conventions for, 203-204 primary dealers for, 196 slope shifts in, 810 primary market for, 195-199 Treasury Inflation Protected Securities (TIPS), 6, 194, 1704, 1706 secondary markets for, 199-204 spot-rates determining price of, 179-181 ALM and, 377-378 trading volume of, 199, 201 appeal of, 366-367 types of, 194 break-even inflation rate for, 370-371 when-issued, 201 cash flow of, 366 yield curve for, 173 corporate issuers of, 382 Treasury STRIPS, CPI and, 368 Tribal casino bonds, 233, 1018 dedicated portfolios for, 378-379 Triffin, Robert, 1341, 1343 definition of, 365-366 Triggers deflation protection for, 382-383 DSCR, 703 duration and, 371-373 for nonagency RMBS, 663 history of, 373 Trinomial lattice models, 851-853, 857-858 international issues with, 375-376 Triparty repo, 1359 investor types for, 379-380 Troubled city bailout bonds, 236 issuers of, 380-382 Trust preferred securities, 478 liquidity of, 374 Trustee Indenture Act, 260 nominal yield of, 369 Tucker, Matthew, 439 "real clean" vs "nominal dirty" quotation of, Tunaru, Radu S., 1525 373-374 real frame of reference for, 368 Turnover, 525 TVA See Tennessee Valley Authority real yield of, 369 risk/return optimization for, 378 Ukraine, 422 strategic use of, 377-380 Underlying securities, 332 tactical use of, 375-376 Underlying stock, 899 taxation and, 382 Underwriting, 215, 219-220 Treasury rationale with, 380-381 loose, 650, 657 valuation and performance dynamics of, mortgage process of, 494-496 374-375 volatility of, 372 yield calculation for, 367 municipal bonds and, 1003 Unfunded hedges effectiveness of, 1613-1615 Treasury Investment Growth Receipts (TIGRs), funded hedges compared to, 1593-1595 Treasury Liquidity Guarantee Program (TLGP), funded hedges risk compared to, 1627-1629 222-223 incorrect base case scenario for, 1617 Index 1807 payoff profile variance in, 1615-1616 of LIBOR TED swaps, 1495-1497 purpose of, 1613 at node, 860-862 slippage with, 1617-1618 of option-free bonds, 867 successful variations with, 1616 of options, 1504-1509 Unsettled buys, 1749 of par spread, 1579 Unsettled sells, 1749-1750 of premium leg, 1576-1578 Unsettled trades, 1747 of protection leg, 1578 Uruguay, 422-423 of putable bond, 870-871 U.S bond indexes for range note, 871, 874 foreign appeal of, 389 in reduced-form credit model, 1037-1038 geometric mean return v^ standard deviation simulation method for, 883-887 in, 43 international bond yields vi-., 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 of step-up callable notes, 871, 871-874 of step-up noncallable notes, multiple stepup, 871, 872 of swaps, 1462, 1464, 1468, 1498-1500 of swaptions, 1490-1495 Value diagram, for convertible securities, 920-923 competition and, 979-980 Value recovery rights (VRRs), 436 corporate structure and, 979 Vanilla bonds See Sequential CMOs credit analysis of, 975-981 Variable-rate, 353 energy sources and, 978-979 issue, 227 leverage and, 980-981 Variable-rate demand obligations (VRDOs), 237 regulation of, 976-977 Variation margin, 1383 territory growth and stability in, 979 Vasicek model, 1112 Utility industry changing structure of, 976 segments within, 976-977 Vega, 306 Very accurately determined maturity bonds (VADM bonds) CMO tranches and, 550-551 VA See Veterans Affairs VADM bonds See Very accurately determined maturity bonds Valuation See also Convertible valuation models of basis swaps, 1495-1497 PACs and, 584 Veterans Affairs (VA), 486 Vintages, 654 V1X index, 1607-1609 Volatility See also Price volatility; Spread volatility; Tracking error volatility of bonds with embedded options, 866-871 average life, 627-628 of Brady bonds, 420 of bond pricing, 35 of call options, 870 caps and, 1532-1533 of callable bond, 866-870 convertible valuation models and implied, 939 of CDS, 1569-1571 convertible valuation models and stock, CDS example, 1585-1588 936-937 ofCDX, 1589-1591 decay, 1695 CMOs and, 881, 883-885 empirical, 1522 convertible securities approaches with, excess return, 1296-1297 925-935 floors and, 1532-1533 currency, 1339, 1341 implied, 1522-1523, 1677-1678, 1695-1697 in emerging markets, 435-436 of interest rates, 165-166 of existing CDS, 1574-1575 layered PACs life, 626-627 of floating-rate issue, 436 long, 1511-1512 of forward start swaps, 1486-1490 of options, 1507 of interest-rate swaps, 1451-1468 portfolio management and, 1074-1077, lattice models for, 866 lattice models for swap, 1480-1486 1521-1523 positions, 1513 1808 Index Volatility (Cont.): White, Alan, 827-828 reverse TACs life, 622-624 White, Todd, 629 short, 1513 Whole loans, 564 swaptions and, 1476-1477 Wholesale channel, 492 of TIPS,372 Williams, George, 828-829, 1480 yield, 165-166, 931,938 Wilson, Eric P., 1635, 1671, 1711 Volatility risk, 29 implied, 1056 Window rates, 214 Working capital, 965-966 Volatility trading, 1351-1352 World Federation of Exchanges (WFE), 51 Volpert, Kenneth E., 1123 World Government Bond Index (WGBI), Volume-weighted average price (VWAP), 1285 1251-1253, 1260 VRDOs See Variable-rate demand obligations Wright, David J., 33 VRRs See Value recovery rights Writing puts, 1521 VWAP See Volume-weighted average price Yankee bonds WAC See Weighted average coupon Eurodollar bonds vs., 390 Wachovia Bank Commercial Mortgage Trust, history of, 392-393 Series 2007-C32 (WBCMT 2007-C32), issuers of, 392 686, 691 market for, 393-394 certificate structure of, 699 in secondary market, 392-393 geographic concentration in, 688 Yankee CDs, 344 loan sponsor concentrations in, 690 Yield advantage, 927 pari passu clause in, 690 Yield beta, 1426 property type concentration of, 689 Yield curve stratification of amortization type of, 689 adjustment trades, 1197 top loans in, 687 bond pricing with, 173-175 WAL See Weighted average life carry, 1691-1692 WAM See Weighted average maturity change return, 1676-1677 Warrants CMO structure of, 570-572 definition of, 14 convexity bias impact on, 754-755 detachable vs nondetachable, 14-15 for corporate bonds, 77-79 WART See Weighted average remaining term decomposing, 777 Washington Mutual, 460 definition of, 77, 173, 746 Washington Public Power Supply System, credit determinants of, 770-772 problems, 239-240 dollar-swap, 758, 762 Water revenue bonds, 233, 1018-1020 downward-sloping, 185 WBCMT 2007-C32 See Wachovia Bank enhancements, 1142-1143 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 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 Weighted average remaining term (WART), 572 idiosyncratic behavior at short end of, 821-823 Wells Fargo, 721-722 implied-swap, 758-759 WFE See World Federation of Exchanges influences on, 745, 749-750, 756-757 WGBI See World Government Bond Index inverted, 185 What-if analysis, 1052 macro investing and, 1337-1341 Wheeler, Ella, 1240 macro-economy and, 77-79 When-issued securities, 201 municipal bonds maturity vs., 251 Index 1809 normal, 185 Yield-to-call for PACs, 570-572 definition of, 108 parallel translation of, 1690-1691 unrealistic assumptions about, 110 portfolio outperformance due to exposure to, yield-to-maturity compared to, 109 1653-1658, 1689-1695 Yield-to-maturity prepayments and, 530 annualizing procedure for, 107-108 rate expectations of, 750-751 calculating, 103-105 risk, 23 current yield formula and coupon rate with scenario analysis, 784-788 relationship with, 107 shape of, 4, 77-78, 802-805 definition of, 746 spread, 171 interest-rate risk and, 105-106 swaptions and changes in, 1475-1476 reinvestment risk and, 105 for Treasury securities, 173 yield-to-call compared to, 109 upward-sloping, 185, 188 for zero-coupon bonds, 106-107 U.S dollar outperformance breakdown for, 1654 Yield-to-worst, 9, 109 Yu, Fan, 1039, 1043 Yield curve shifts curvature, 803-804, 810, 813 Z bonds See also Jump Zs determinants of, 797-805 accrual structure of, 594-597, 599 duration of, 819, 821 CMO tranches and, 549-550, 597-600 economic expectations causing, 802-805 CMOs with PACs and, 600-603 economic v^ noneconomic factors in, definition of, 593 798-801 empirical correlations v^- theoretical correlations for, 816-821 FHLMC 1727 Z, 604 FNMA 89-15, 609 FNMA 93-204 J, 604 hump, 815-816 history of, 593 inflation risk and, 814 PACs and, 581-584 level, 803-804 performance of, 603-604 parallel, 809 prepayment risk and, 603 partial durations and, 818-819, 820 prepayment speed with, 595-596 PCA identifying, 805-813 principal balance over time of, 595 portfolio risk management and, 813-816 structures with multiple, 605-611 sensitivity to, 797 trick, 607-609 slope, 803-804, 810 yield of, 596-597 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 Z PACs, 605 Z score model, 993 Zero spread, 435 0/0 framework, 701 Zero-coupon bonds, 204, 228 in bankruptcies, 262-263 for bond portfolio, 110-111 definition of, 6, 263 for floating-rate securities, 111-113 pricing, 97-98 Yield spread, hedging and, 1426-1427 sample portfolio of, 785 Yield table, 1329-1330 yield-change split of, 773 Yield volatility, 165-166, 931, 938 yield-to-maturity for, 106-107 Yield-spread pickup trades, 1194-1195 Zero-coupon Treasury securities, 204-205 Yield-tilt enhancements, 1143 Zhong, Pam, 1635, 1671, 1711 ABOUT THE EDITORS Frank J Fabozzi is professor of finance at EDHEC Business School and a member of the EDHEC Risk Institute Fabozzi has authored and edited a number of books on investment management, is editor of the Journal of Portfolio Management, and serves on the board of directors of the BlackRock complex of closed-end funds Fabozzi is the 2007 recipient of the C Stewart Sheppard Award given by the CFA Institute He lives in Buckingham, PA Steven V Mann is professor of finance at the Darla Moore School of Business, University of South Carolina He has coauthored several books, including Floating-Rate Securities, Introduction to Fixed Income Analytics, and Global Money Markets Mann lives in Columbia, SC ... ACKNOWLEDGMENTS © The first edition of The Handbook of Fixed Income Securities was published three decades ago Over the years and eight editions of the book, I have benehted from the guidance of many participants... coverage of the wide range of fixed income products and fixed income portfolio management strategies Each chapter is written by an authority on the subject The eighth edition of the Handbook. .. information about the investment features of fixed income securities, the risks associated with investing in fixed income securities, and background information about fixed income primary and