Fixed Income Markets and Their Derivatives, Third Edition (Academic Press Advanced Finance) PDF
Preview Fixed Income Markets and Their Derivatives, Third Edition (Academic Press Advanced Finance)
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 This page intentionally left blank Fixed Income Markets and Their Derivatives This page intentionally left blank Fixed Income Markets and Their Derivatives Third Edition Suresh Sundaresan AMSTERDAM • BOSTON • HEIDELBERG • LONDON NEW YORK • OXFORD • PARIS • SAN DIEGO SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO Academic Press is an imprint of Elsevier Academic Press is an imprint of Elsevier 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA 525 B Street, Suite 1900, San Diego, California 92101-4495, USA 84 Theobald’s Road, London WC1X 8RR, UK Copyright © 2009, Elsevier Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the publisher. Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone: ((cid:2) 44) 1865 843830, fax: ((cid:2) 44) 1865 853333, E-mail: [email protected]. You may also complete your request online via the Elsevier homepage (h ttp://elsevier.com ), by selecting “ Support & Contact ” then “ Copyright and Permission” and then “ Obtaining Permissions.” Library of Congress Cataloging-in-Publication Data A pplication submitted British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: 978-0-12-370471-9 For information on all Academic Press publications visit our Web site at w ww.elsevierdirect.com Typeset by Macmillan Publishing Solutions (www.macmillansolutions.com) Printed in the United States of America 09 10 11 9 8 7 6 5 4 3 2 1 T o Raji, Savitar, and Sriya This page intentionally left blank 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
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