Fixed Income Markets

Management, Trading and Hedging

Moorad Choudhry, David Moskovic, Max Wong

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9781118171721
• eBook ISBN: 9781118171752
• Edition: 2
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

A comprehensive, in-depth look at global debt capital markets in the post-crisis world

Fully updated with comprehensive coverage of the post-crisis debt markets and their impact on key industry issues, Fixed Income Markets: Management, Trading, and Hedging, Second Edition offers insights into derivative pricing, cross-currency hedging, and new liquidity legislation. Written by Choudhry, Moskovic, and Wong, Fixed Income Markets is an indispensable read for anyone working in bond markets, interest-rate markets, and credit derivatives markets looking to better understand today's debt markets.

This acclaimed book takes a unique look into the leading practices in bond markets as well as post-credit-crunch impacts on pricing that are rarely captured in textbooks. The new edition provides expanded coverage on a wide range of topics within hedging, derivatives, bonds, rebalancing, and global debt capital markets. New topics include:

• Dynamic hedging practices and cross-currency hedging
• Collateralized and uncollateralized derivatives, and their impact on valuation
• Callable bonds, pricing, trading, and regulatory aspects related to liquidity
• Rebalancing as a method for capturing contingencies and other complex imbedded risks

As a bonus, the book includes reference information for statistical concepts and fixed income pricing, as well as a full glossary and index. Written in Choudhry's usual accessible style, Fixed Income Markets is a comprehensive and in-depth account of the global debt capital markets in today's post-crisis world.

PART One
Introduction to Bonds

In Part One, we describe the key concepts in fixed-income market analysis, which cover the basics of the bond instrument. The building blocks described here are generic and are applicable in any market. The analysis is simplest when restricted to plain-vanilla default-free bonds; as the instruments become more complex, we are required to introduce additional techniques and assumptions. Part One comprises five chapters. We begin with bond pricing and yield, followed by traditional interest-rate risk measures such as modified duration and convexity. This is followed by a look at spot and forward rates, the derivation of such rates from market yields, and the concept of the yield curve. Yield-curve analysis and the modelling of the term structure of interest rates is one of the most heavily researched areas of financial economics. The treatment here is kept as concise as possible, which sacrifices some detail, but bibliographies at the end of each chapter will direct interested readers to what are the most accessible and readable references in this area.

While we do not describe specifics of particular markets, it is important to remember that the general concepts discussed here are pertinent to debt markets in every jurisdiction.

CHAPTER 1
The Bond Instrument

Bonds are debt-capital market instruments that represent a cash flow payable during a specified time period heading into the future. This cash flow represents the interest payable on the loan and the loan redemption. So, essentially, a bond is a loan, albeit one that is tradable in a secondary market. This differentiates bond-market securities from commercial bank loans.

In the analysis that follows, bonds are assumed to be default-free, which means that there is no possibility that the interest payments and principal repayment will not be made. Such an assumption is reasonable when one is referring to government bonds such as U.S. Treasuries, UK gilts, Japanese JGBs, and so on. However, it is unreasonable when applied to bonds issued by corporates or lower-rated sovereign borrowers. Nevertheless, it is still relevant to understand the valuation and analysis of bonds that are default-free, as the pricing of bonds that carry default risk is based on the price of risk-free securities. Essentially, the price investors charge borrowers that are not of risk-free credit standing is the price of government securities plus some credit risk premium.

BOND-MARKET BASICS

All bonds are described in terms of their issuer, maturity date, and coupon. For a default-free conventional, or plain-vanilla, bond, this will be the essential information required. Nonvanilla bonds are defined by further characteristics such as their interest basis, flexibilities in their maturity date, credit risk, and so on.

Figure 1.1 shows screen DES from the Bloomberg system. This page describes the key characteristics of a bond. From Figure 1.1, we see a description of a bond issued by the Singapore government, the 4.625% of 2010. This tells us the following bond characteristics:

Issue date	July 2000
Coupon	4.625%
Maturity date	1 July 2010
Issue currency	Singapore dollars
Issue size	SGD 3.4 million
Credit rating	AAA/Aaa

FIGURE 1.1 Bloomberg Screen DES Showing Details of

% 2010 Issued by Republic of Singapore as of 20 October 2003

Used with permission of Bloomberg L.P. Copyright© 2014. All rights reserved.

Calling up screen DES for any bond, provided it is supported by Bloomberg, will provide us with its key details. Later on, we will see how nonvanilla bonds include special features that investors take into consideration in their analysis.

We will consider the essential characteristics of bonds later in this chapter. First, we rev...

Table of contents

• Cover
• Series
• Titlepage
• Copyright
• Author Disclaimer
• Dedication
• Foreword
• Preface
• About the Authors
• PART ONE Introduction to Bonds
• PART TWO Selected Market Instruments
• PART THREE Derivative Instruments
• PART FOUR Bond Trading and Hedging
• APPENDIX A Statistical Concepts
• APPENDIX B Basic Tools
• APPENDIX C Introduction to the Mathematics of Fixed-Income Pricing
• APPENDIX D About the Companion Website
• Glossary
• Index
• End User License Agreement