This book gives an introduction to the bond markets for practitioners and new entrants who need to understand what they are, how they work and how they can be used, but do not want to be intimidated by mathematical formulae. By the end of the book readers will be able to decide whether to invest in the bond market. The mathematical formulae will be relegated to the appendices and supplemented by a companion website which allows users to enter their own bond market investments, to simulate anticipated events and see the results.
- Patrick Brown is well-known as Chairman of the European Bond commission (recently retired)
- The only bond book that does not rely heavily on mathematical formulae
An Introduction to the Bond Markets......Page 4
Contents......Page 10
Preface......Page 14
Disclaimer......Page 18
Introduction......Page 20
1 What is a Bond and Who Issues Them?......Page 22
1.1.4 Coupon Payments and Frequency......Page 23
1.1.5 Redemption Amount and Maturity Dates......Page 24
1.1.6 Embedded Options......Page 25
1.1.7 Guarantee......Page 26
1.1.8 Where Quoted and Traded......Page 27
1.2 The Difference between Corporate Bonds and Equities......Page 28
2.1.1 Straight Coupon Bonds......Page 30
2.1.2 Zero-Coupon Bonds......Page 31
2.1.4 Strippable Bonds and Strips......Page 32
2.1.5 Bonds with Sinking Funds......Page 34
2.1.6 Step-Up or Graduated-Rate Bonds......Page 35
2.1.7 Annuities......Page 36
2.2 Floating-Rate Notes......Page 37
2.3 Index-Linked Bonds......Page 40
2.5.2 Certificates of Deposit......Page 43
2.5.3 Commercial Paper......Page 44
2.5.4 Medium-Term Notes......Page 45
2.5.5 Preference Shares......Page 46
2.5.6 Permanent Interest Bearing Shares......Page 47
3.1 Compound Interest......Page 48
3.2 Discounting and Yield Considerations......Page 50
3.3 Accrued Interest......Page 53
3.4 How Bonds are Quoted......Page 55
3.5 Bond Pricing......Page 57
3.6 Yields and Related Measures......Page 59
3.6.1 Current Yield......Page 60
3.6.2 Simple Yield to Maturity......Page 61
3.6.3 Redemption Yield......Page 62
3.6.4 Life and Duration......Page 68
3.6.5 Modified Duration......Page 73
3.6.6 Convexity......Page 77
3.6.7 Dispersion......Page 78
3.7.1 Simple Margin (FRN)......Page 80
3.7.2 Discounted Margin (FRN)......Page 81
3.8 Real Redemption Yield......Page 83
3.9 Money Market Yields and Discounts......Page 84
4.1 Callable Bonds......Page 86
4.2 Putable Bonds......Page 88
4.3 Convertible Bonds......Page 90
4.5 Mortgage-Backed Securities......Page 94
4.6 Collateralized Debt Obligations......Page 95
4.8 Reverse Floaters......Page 96
4.9 Bonds with Warrants Attached......Page 98
5.1 Yield Curve Shapes......Page 100
5.2 Zero-Coupon or Spot Yield Curves......Page 103
5.3 Forward or Forward–Forward Yield Curves......Page 105
5.4 Par Yield Curves......Page 106
5.5 Investment Strategies for Possible Yield Curve Changes......Page 109
6 Repos......Page 116
6.1 Classic Repos......Page 121
6.2 Sell/Buy-Backs......Page 124
6.3 Stock Borrowing/Lending......Page 125
7.1 Buying a Call Option......Page 128
7.3 Buying a Put Option......Page 129
7.5 Theoretical Value of an Option......Page 131
7.6 Combining Options......Page 132
8.1 Credit Risk......Page 136
8.1.1 Covenants......Page 137
8.1.2 Ratings......Page 138
8.2 Liquidity......Page 140
9.1.1 Interest Rate Swap......Page 144
9.1.3 Cross-Currency Swap......Page 151
9.1.5 Forward Rate Agreement......Page 153
9.4 Futures......Page 154
9.5 Credit Default Swaps......Page 158
10.1 Holding Period Returns......Page 162
10.2 Immunization......Page 164
10.3 Portfolio Measures......Page 165
10.4 Allowing for Tax......Page 166
11.1 Bond Index Classifications......Page 168
11.2 Choosing Indices......Page 169
11.3 Index Data Calculations......Page 170
11.4.1 Large Changes in the Constituents of the Index......Page 171
11.4.3 Bonds Dropped due to Lack of Prices......Page 172
11.4.4 Ratings Downgrade......Page 173
Appendix A. Using the Companion Website......Page 174
B.1 Accrued Interest......Page 176
B.3 Simple Yield to Maturity......Page 179
B.4 Redemption Yield......Page 180
B.5 Duration......Page 183
B.6 Modified Duration......Page 184
B.7 Convexity......Page 185
B.8 Dispersion......Page 186
B.9 Annuities......Page 187
B.11 Discounted Margin......Page 188
B.12 Real Redemption Yield......Page 189
B.13 Convertible Calculations......Page 190
B.14 Discount......Page 191
B.17 Warrant Calculations......Page 192
B.18 Compounding Frequency Adjustments......Page 193
B.19 Portfolio Yield......Page 195
B.21 Portfolio Modified Duration......Page 196
Appendix C. Bond Market Glossary......Page 198
References......Page 236
Index......Page 238
