Fixed Income Markets and Their Derivatives, Third Edition (Academic Press Advanced Finance)

456 Pages·2009·4.82 MB·English

by  Suresh Sundaresan

Advance Praise for the Third Edition
of Fixed Income Markets and Their
Derivatives
“ A comprehensive blend of theoretical and practical material covering this dynamic
market, Suresh Sundaresan’s F ixed Income Markets and Their Derivatives pro-
vides a detailed view of the debt markets, enhanced in the third edition by extensive
exploration of derivatives applications and strategies. Tightly organized chapters cre-
ate a solid foundation with concepts, defi nitions and models, and build to complex,
but well illustrated, practical examples. More than a textbook, this volume is a valu-
able addition to the reference bookshelf. ”
—Paul Calello, CEO, Investment Bank, Credit Suisse
“ Sundaresan’s F ixed Income Markets and Their Derivatives, already the most
comprehensive textbook on the subject, is thoroughly revised and updated in this
new edition. Readers will especially appreciate Sundaresan’s coverage of the fi nan-
cial crisis that began in 2007, and his clear explanations of a wide range of fi xed-
income fi nancial products.”
—Darrell Duffi e, Dean Witter Distinguished Professor of Finance,
Stanford University, CA
“ This new edition of an expansive and erudite text on fi xed income markets by one
of the most highly respected scholars in the fi eld should be a welcome event for
practitioners and academics alike.”
—Andrew W. Lo, Harris & Harris Group Professor,
MIT Sloan School of Management, MA
“ This book provides an excellent introduction to the fi xed income markets. Its well-
organized chapters cover both the practical aspects of fi xed income securities,
contracts, derivatives, and markets as well as the fundamental economic principles
needed to navigate the fi xed income world. This is defi nitely a must-have book for
anyone interested in learning about these fast-paced markets.”
—Francis A. Longstaff, Allstate Professor of Insurance and Finance
UCLA/Anderson School, CA
“ This is an outstanding book. What makes it stand out is the truly excellent balance
that Professor Sundaresan has managed to achieve between theory and institutional
material and between breadth and depth. The book’s range is also unusually good
with excellent coverage on credit risky bonds, credit derivatives and mortgages. It is
an ideal book for MBA courses on fi xed income.”
—Stephen Schaefer, Professor of Finance, London Business School, UK
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Fixed Income Markets

and Their Derivatives
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Fixed Income Markets
and Their Derivatives
Third Edition
Suresh Sundaresan

AMSTERDAM • BOSTON • HEIDELBERG • LONDON
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ISBN: 978-0-12-370471-9
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09 10 11 9 8 7 6 5 4 3 2 1
T o
Raji, Savitar, and Sriya
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Contents
Preface .....................................................................................................................xvii
Acknowledgments ....................................................................................................xix
PART 1 INSTITUTIONS AND CONVENTIONS

CHAPTER 1 Overview of Fixed Income Markets ........................................03
1.1 Overview of Debt Contracts ...........................................................03
1.1.1 Cash-Flow Rights of Debt Securities ......................................07
1.1.2 Primary and Secondary Markets ............................................08
1.2 Players and Their Objectives. ..........................................................08
1.2.1 Governments .........................................................................10
1.2.2 Central Banks .........................................................................10
1.2.3 Federal Agencies and Government-Sponsored
Enterprises (GSEs) .................................................................10
1.2.4 Corporations and Banks ........................................................11
1.2.5 Financial Institutions and Dealers .........................................11
1.2.6“ Buy-Side” Institutions ............................................................11
1.2.7 Households ............................................................................11
1.3 Classifi cation of Debt Securities .....................................................12
1.4 Risk of Debt Securities ...................................................................14
1.4.1 Interest Rate Risk ...................................................................14
1.4.2 Credit Risk .............................................................................15
1.4.3 Liquidity Risk .........................................................................16
1.4.4 Contractual Risk ....................................................................18
1.4.5 Infl ation Risk ..........................................................................19
1.4.6 Event Risk ..............................................................................20
1.4.7 Tax Risk ..................................................................................20
1.4.8 FX Risk ...................................................................................20
1.5 Return-Risk History ........................................................................21
Suggested References and Readings .......................................................24
CHAPTER 2 Price-Yield Conventions ...........................................................25
2.1 Concepts of Compounding and Discounting .................................25
2.1.1 Future Values. .........................................................................25
2.1.2 Annuities ................................................................................27
2.1.3 Present Values ........................................................................29