Fixed Income Securities : Concepts and Applications

479 Pages·2019·4.721 MB·English

by  Parameswaran, Sunil Kumar

SunilKumarParameswaran
FixedIncomeSecurities

Sunil Kumar Parameswaran
Fixed Income
Securities
|
Concepts and Applications
ISBN978-1-5474-1673-8
e-ISBN(PDF)978-1-5474-0066-9
e-ISBN(EPUB)978-1-5474-0068-3
LibraryofCongressControlNumber:2019948232
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TheDeutscheNationalbibliothekliststhispublicationintheDeutscheNationalbibliografie;
detailedbibliographicdataareavailableontheInternetathttp://dnb.dnb.de.
©2020SunilKumarParameswaran
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Advance Praise for Fixed Income Securities
Thisbookisaveryconciseworkwhichcollectsthemajorthemesoffixedincome.For
example,youtreatmortgagesandtheirmathematicswhichareveryuseful,butwhich
surprisinglyaren’taddressedanywhereelseinanaccessibleway.Theabundanceof
examplesinthisbookmakesitveryusefulforuniversityprofessorsasabasetoteach
fixedincomeandIwillcertainlyconsideradoptingthisasabookinmyuniversityand
recommendittoothers.
Prof.YaacovKopeliovich,UniversityofConnecticut
Dr. Parameswaran’s new book, Fixed Income Securities: Concepts and Applications,
achievessomethingthatistrulyhard—anintroductiontotheworldoffixedincome
marketsthatisbothcomprehensiveandlucid.Eachchapterintroducesanewcon-
cept,andexplainsthetheorythroughdetailedexamples.Theunderlyingmathemat-
icsisdemystifiedbyworkingouteachstepexplicitly.Thesimplicityoftheexposition
makesthebooksuitablenotonlyforagraduateclass,butalsoforanadvancedun-
dergraduateclass.Theaccessibilityofthebookalsomakesitsuitableforself-study.
Prof.NikunjKapadia,UniversityofMassachusetts
Thisbookprovidescomprehensivelearningmaterialforfixedincomesecuritiesand
therelatedmarkets.Theauthordoesagreatjobcoveringboththefundamentalcon-
ceptsandthemoreadvancedapplicationsoffixedincomesecurities.Thescopeofthe
bookisbroad,yetitalsoprovidestherightamountofdepthoneachtopic.
Whatmakesthisbookstandoutistheauthor’sreviewofrelatedkeyfinancecon-
ceptsbeforedivingintotheworldoffixedincomesecurities.
Thisbookthuscanbeusedasacomprehensivetextbookforanundergraduate
courseonfixedincomesecurities,aneasy-to-absorbself-learningguideforsomeone
whoisnewtofixedincomesecurities,andareferencebookformoreexperiencedread-
erswhoarelookingtorefreshtheirknowledgeonaspecifictopic.
Prof.LinglingWang,UniversityofConnecticut
https://doi.org/10.1515/9781547400669-201

Foreword
IwaspleasedandhonoredwhenSunilaskedmetowriteaforewordforhisupcoming
book,FixedIncomeSecurities:ConceptsandApplications.SunilandIweregraduate
studentsatDukeUniversity’sFuquaSchoolofBusinessinthemid-1980s,completing
ourrelevantclassworkandworkingforthesameprofessor.WhileSunilsubsequently
wentontocompletehisPhD,IleftafterearningmyMBA,andjoinedSmithBreeden
AssociateswhereIworkedfor30yearsintheinstitutionalfixedincomeassetmanage-
mentbusinessprimarilyasaleadport-foliomanager.AtSmithBreeden,Istartedin
theresearchdepartmentbuildingcomplexmodelstovaluemortgagebackedsecuri-
ties.Afterafewyears,Iwaspromotedtotheportfoliomanagementside.Inthatrole
Imanagedabilliondollarfixedincomeportfoliocomprisedofthesamefixedincome
securitiessowellcoveredinthisbookbySunil.Needlesstosay,Iwouldhavebeenan
avidconsumerofthisbook,ifithadbeenmadeavailableafewyearsearlier.Sunil’s
bookcoversinadequatedetailthetheoreticalintricaciesandformulasthatIusedreg-
ularlytobuildmodels,andfocusesonthetoolswhichenabledmetomanagehighly
complexinstitutionalbondportfolios.Novelinvestmentstrategiescanblossomfrom
themostrudimentaryconceptsinfinancewithabitofcreativity.Anexamplewould
be the S&P 500 plus portfolios I managed which garnered attention in the form of
featuredarticlesfromMoneymagazine,Fortunemagazineandotherwell-readperi-
odicals.Iwasoftenasked,“Whatisafixedincomegeekdoingmanaginganequity
product?”Thesimpleansweristhatthetwoproductclassesarenotmutuallyexclu-
sive.Utilizingthedetailedknowledgeofvariousdebtfinancialinstrumentscovered
inthisbook,Sunilprovidesthetoolsandknowledgethatprofessionalslikemeneed
toportortransferourfixedincomeexpertiseovertotheequitymarkets.Anin-depth
understandingoftheassetsandhedgingtoolscoveredinthisbookisthelynchpinto
constructanyfixedincomeportfolio.AtSmithBreedenwebuiltportfoliosoflonger
durationspreadassetswherewehadspecificexpertise(oftenAgencyMBS)andthen
immunizedorhedgedtheportfoliodurationtonearzeroutilizingfuturescontracts
orinterestrateswaps.Theremainingnegativeconvexitywashedgedutilizingswap-
tions,futuresoptions,ordynamicallyhedgedusingfuturescontracts.Theendresult
wasthecreationofacashlikeportfoliointermsofdurationandconvexityrisk,but
whichretainedtheassetspread(andrisk)oftheunderlyingassetswhichwedesired.
Fixedincomegeekslikemecouldnowusetheirexpertiseinonemarkettoaddvalue
toanothermarket.Thisopenedupawholenewmarketforusandgeneratedsignif-
icantmarketingbuzzaswell.Iamoftheopinionthatthetheoreticalprecision,and
expositionalclarityofthisbookwouldhavebeenaninvaluableassetformeandmy
colleagues. This is just one example of how the topics covered in such great detail
herecanbeutilizedbyaseriousfinancestudentorinvestmentprofessional.Sunil’s
bookcoversallthesetopicsandmoreintheconciseandeasytolocatemannerofa
referencebook.IwishIhadthisbookasaresourceforalltherelevantfixedincome
https://doi.org/10.1515/9781547400669-202
viii | Foreword
formulasandExcelcommandswhileIwasbuildinghighpoweredfixedincometools
andmodels.Thisbookiscomprehensive,concise,andembellishedwiththerequired
expositionalclarity.Ithastherequiredrigorwithoutbeingtoomathematicallyheavy
tobeoutofreachforareader.Currentstudentsandpractitionersareluckytohaveit
allhere.
JohnSprow,ChapelHill,NC,USA
FormerSeniorPortfolioManager,ChiefRiskOfficer,ExecutiveCommittee,
BoardofDirectorsatSmithBreedenAssociates.Currentlyretired.
Preface
Thisbookistheendresultof25yearsofteachingatbusinessschoolsacrosstheglobe,
andabout15yearsofcorporatetrainingforsomeoftheleadinginformationtechnol-
ogy,andfinancialservicescompanies.Thefeedbackfrommystudentsandclients,
hasbeenextremelyvaluableandIamindebtedtothemfortheinputsandconstruc-
tivecriticism.Nothingismorevaluableforteachersandauthors,thanfeedback,both
positiveaswellascritical.
AsastudentIwasdeeplyinfluencedbyvariousbooksonfixedincomeproducts,
inparticular,theworksofFrankFabozzi.Lateroninthecourseofmyprofessional
career,IhavebenefitedfromthebooksofvariousauthorssuchasKennethGarbade,
MooradChoudhary,andSureshSundaresan.Ioweatremendousintellectualdebtto
theseandotherauthorswhohaveinfluencedme.
IhaveovertheyearsmadeextensiveuseofExcelwhileteachingcoursesandpro-
gramsonfixedincomeproducts.IamoftheopinionthatExcelfacilitatestheexposi-
tion,andaidsthecomprehensionofconcepts.Inparticular,Excelfunctionsmakethe
computationofcomplexmathematicalexpressionsextremelyeasy.Thisbookthere-
foreillustratesvariousExcelfunctionswhichareessentialforthestudyoffixedin-
come markets. Each function, and the parameters required to be specified, is dis-
cussedindetail.GoalSeekandSolver,aretwotoolsinExcelthatfacilitatecompu-
tationofsolutionsforcomplexnon-linearexpressions.Ihavemadeextensiveuseof
these and there is an appendix at the end of the book, which explains how to use
them.
This course starts and builds from first principles. All that I expect is that the
readerhaveabasicknowledgeoffinance,andaninterestinfixedincomemarkets.
Thefirstchapterisontimevalueofmoney,whichisthefundamentalbuildingblock
foranystudyoffinancetheory.Thechapterisdetailed,anddemonstratestheuseof
Excelinelaboratedetailtosolveproblems.Thereisadetaileddiscussionoffutures
andforwards,options,andswapstowardtheendofthebook.TohelpthereaderI
haveprovidedacomprehensiveprimeronderivatives.Therearetworeasonsforthis.
Thefirstistoensurethatareaderneednotrefertoanothertextbook,ifheorshewere
tohaveanyqueriespertainingtotheoreticalissuesonderivatives.Second,Iwanted
toensurethatthematerialonderivativesiswritteninmystyle,sothatitseamlessly
blendsintomypresentationsonfixedincomeproducts.
Thisbookshouldbeavaluablereferenceforpractitionersandprofessionalsin
financial markets in the English speaking world. Students in MBA programs, and
possiblyadventurousstudentsinBBAprograms,shouldalsofindthisbooktobean
extremelyusefulresource.Thebookhasaglobalfocusandperspective,andhence
shouldcatertoreadersacrossgeographies.
https://doi.org/10.1515/9781547400669-203