Table Of ContentDebt Markets and Investments
FINANCIAL MARKETS AND INVESTMENTS SERIES
H. Kent Baker and Greg Filbeck, Series Editors
Portfolio Theory and Management
Edited by H. Kent Baker and Greg Filbeck
Public Real Estate Markets and Investments
Edited by H. Kent Baker and Peter Chinloy
Private Real Estate Markets and Investments
Edited by H. Kent Baker and Peter Chinloy
Investment Risk Management
Edited by H. Kent Baker and Greg Filbeck
Private Equity: Opportunities and Risks
Edited by H. Kent Baker, Greg Filbeck, and Halil Kiymaz
Mutual Funds and Exchange- Traded Funds: Building Blocks to Wealth
Edited by H. Kent Baker, Greg Filbeck, and Halil Kiymaz
Financial Behavior: Players, Services, Products, and Markets
Edited by H. Kent Baker, Greg Filbeck, and Victor Riccardi
Hedge Funds: Structure, Strategies, and Performance
Edited by H. Kent Baker and Greg Filbeck
Commodities: Markets, Performance, and Strategies
Edited by H. Kent Baker, Greg Filbeck, and Jeffrey H. Harris
Debt Markets and Investments
Edited by H. Kent Baker, Greg Filbeck, and Andrew C. Spieler
Debt Markets and
Investments
EDITED BY
H. KENT BAKER, GREG FILBECK,
AND
ANDREW C. SPIELER
1
1
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ISBN 978– 0– 19– 087743– 9
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Printed by Sheridan Books, Inc., United States of America
CONTENTS
List of Figures ix
List of Tables xiii
Acknowledgments xvii
About the Editors xix
About the Contributors xxi
PART I BACKGROUND
1. Debt Markets and Investments: An Overview 3
H. Kent Baker, Greg Filbeck, and Andrew C. Spieler
2. Debt Fundamentals and Indices 23
Ryan J. Dodge, Steven T. Petra, and Andrew C. Spieler
3. Interest Rate Risk, Measurement, and Management 41
Tom Barkley
4. Other Risks Associated with Debt Securities 63
Randolph D. Nordby
PART II MARKET SECTORS
5. Government Debt 81
Keith Pareti and Rob Kennedy
6. Municipal Bonds 95
Xiaohu Deng, Christopher Goebert, Gershon Morgulis, and
Isaac Yates
7. Corporate Bond Markets 113
Kelly E. Carter
v
vi Contents
8. Securitized Debt Markets 131
Şenay Ağca and Saiyid S. Islam
9. Derivatives Markets 151
Halil Kiymaz and Koray D. Simsek
10. Short- Term Funding and Financing Alternatives 167
Benjamin Aguilar, Ajit Jain, and Kevin Neaves
11. Private Debt Markets 185
Douglas Cumming, Grant Fleming, and Zhangxin (Frank) Liu
PART III YIELD CURVES, SWAP CURVES, AND INTEREST
RATE MODELS
12. Yield Curves, Swap Curves, and Term Structure of Interest Rates 203
Tom P. Davis and Dmitri Mossessian
13. Models of the Yield Curve and Term Structure 229
Tom P. Davis and Dmitri Mossessian
PART IV BOND PRODUCTS
14. International Bonds 249
Soutonnoma Ouedraogo, David Scofield, and Garrett C. Smith
15. Floating Rate Notes 265
Aby Abraham, John Casares, and Jibran Ali Shah
16. Bonds with Embedded Options 283
Christopher J. Barnes, Gaurav Gupta, and Joseph F. Abinanti
17. Bond Mutual Funds, Closed- End Bond Funds, and Exchange- Traded
Funds 305
Halil Kiymaz and Koray D. Simsek
18. Other Bond Products: Social Impact Bonds, Death Bonds, Catastrophe
Bonds, Green Bonds, and Covered Bonds 325
Erik Devos, Robert Karpowicz, and Andrew C. Spieler
19. Inflation- Linked Bonds 345
John Lettieri, Gerald O’Donnell, Seow Eng Ong, and
Desmond Tsang
Contents vii
PART V SECURITIZED PRODUCTS
20. Securitization Process 365
Mark Ferguson, Joseph McBride, and Kevin Tripp
21. Mortgage- Backed Securities: Mortgage Pass-Through Securities 383
Mingwei (Max) Liang and Milena Petrova
22. Asset- Backed Securities 403
Massimo Guidolin and Manuela Pedio
23. Collateralized Debt Obligations, Collateralized Bond Obligations, and
Collateralized Loan Obligations 421
Robert Eckrote, Christopher Milliken, Ehsan Nikbakht, and
Andrew C. Spieler
PART VI BOND VALUATION AND ANALYSIS
24. Factors Affecting Bond Pricing and Valuation 437
Mark Wu, Xiang Gao, and Robert Wieczorek II
25. Valuing and Analyzing Bonds with Embedded Options 453
Yiying Cheng
26. Valuing and Analyzing Mortgage- Backed and Asset- Backed
Securities 477
Matthew Dyer
27. Valuing and Analyzing Fixed Income Derivatives 501
Koray D. Simsek and Halil Kiymaz
PART VII SPECIAL TOPICS
28. Credit Analysis and Ratings 523
Peter Dadalt, Michael Gueli, Rafay Khalid, and Ling Zhang
29. Bond Auctions 547
Mark Wu, Patrick Herb, and Shishir Paudel
30. Bond Accounting 567
Oluwaseyi Adebayo Awoga
31. High Yield Bonds 599
Byron C. Barnes, Tony Calenda, and Elvis Rodriguez
viii Contents
32. Distressed Debt 621
Seoyoung Kim
33. Microstructure of Fixed Income Trading 639
Matthew John Jerabeck, Marc Perkins, and David Petruzzellis
PART VIII STRATEGIES, PORTFOLIO MANAGEMENT,
AND FUTURE OUTLOOK
34. Debt Investment Strategies 661
Steven Cosares, Taylor Riggs, and Andrew C. Spieler
35. Debt Portfolio Management 679
Zachary Jersky and He Li
36. Debt Trends and Future Outlook 699
Dianna Preece
Discussion Questions and Answers 717
Index 763
FIGURES
3.1 Macaulay Duration: A Representation of Cash Flows 46
3.2 Macaulay Duration versus Maturity 48
3.3 Modified Duration Approximation 50
3.4 Properties of Convexity 53
8.1 A Simplified Securitized Debt Transaction Structure 133
8.2 Residential Mortgage Backed Securities (RMBS) Issuance 139
8.3 Types of U.S. Non- Agency Securitized Debt Issuance in 2017 146
8.4 Global Share of Non- Agency Securitized Debt Issuance in 2017 147
8.5 Recent Non- Agency Securitized Debt Issuance in the Three Largest
Markets 147
9.1 Growth of the Over-t he- Counter Interest Rate Derivatives Markets 152
9.2 Daily Average Turnover for Interest Rate Derivatives 153
9.3 Exchange- Traded Interest Rate Derivatives 154
9.4 Key Dates for an FRA 156
10.1 Purchase Order Financing Mechanics Illustration 175
11.1 Firm Size, Information Availability, and Types of Private Debt 186
12.1 Spline Instability 211
12.2 Fitted U.S. Treasury Curve for June 8, 2017, Together with Market Quoted
Yields for All Traded Notes and Bonds 218
12.3 Time Series of the Spreads to a Fitted Curve 219
12.4 European Basis Spreads Before and After the Global Financial Crisis 222
12.5 EURIBOR Projection Curves and EONIA Discounting Curves for
September 20, 2017 224
15.1 Plain Floating Rate Note 269
15.2 Capped Floating Rate Note 270
15.3 Floored Floating Rate Note 271
15.4 Collared Floating Rate Note 271
16.1 Profit Diagrams of Long/ Short Call/ Put Options 286
16.2 Price- Yield Relation for Callable, Puttable, and Option- Free Bonds 290
16.3 Convertible Issuance by Region between 2005 and 2016 293
16.4 Implied Market Capitalization of Outstanding Convertible Bonds by
Sector 294
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