Fixed Income Mathematics: Analytical & Statistical Techniques
As interest rate fluctuations in the fixed income markets have become increasingly volatile, and fix...
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As interest rate fluctuations in the fixed income markets have become increasingly volatile, and fixed income instruments themselves have grown more complex, bond market participants have had to revise and expand upon the traditional analytical tools used to value bonds and assess price/yield behavior. In this environment, where fewer bonds are held to maturity, measures such as yield-to-maturity and yield-to-call have become increasingly irrelevant in portfolio management. New terms such as duration, effective duration, convexity, negative convexity, option-adjusted spread, total return, PSA, CPR, spot and forward rates, and option cost have come into use, the result of many new analytical frameworks and methodologies that have been developed and are now employed to evaluate fixed income securities and portfolio strategies.Fixed Income Mathematics, Revised Edition, has been written to provide participants in the fixed income market with an understanding of the underlying mathematical concepts and tools behind these analytical frameworks and methodologies, as well as their applications for evaluating alternative fixed income securities and portfolio strategies. It is designed as a working reference, and provides a comprehensive and didactic presentation of each concept covered and its use in fixed income portfolio management.This new and completely revised edition reflects the advances in fixed income analysis. Beginning with the basic foundations of the mathematics of finance, author Frank J. Fabozzi thoroughly explains how to calculate the future value of an investment, present value of an expected cash flow and yield. In Part II, he extends present value analysis to bonds, showing how their price is determined, with expanded coverage on day count conventions, accrued interest, the yield on floating-rate notes, portfolio yield measures and their limitations and scenario analysis.To implement effective portfolio trading and risk management strategies it is necessary to understand the price volatility characteristics of bonds. In Part III the characteristics of bonds that determine their price volatility and several measures of bond price volatility are explained.In Part IV, the Treasury yield curve and spot and forward rates are explained and applied to fixed income valuation.Part V analyzes bonds with embedded options and sets forth a relatively new model based on the work of Andrew Kalotay Associates that can be used to value bonds and embedded options.Expanded coverage of mortgage-backed securities is provided in Part VI. Special attention is paid to techniques for valuing mortgage-backed securities, including cash flow yield and option-adjusted spread methodologies.And, finally, a new section on statistical and management science techniques has been added to the book. Fixed income portfolio management increasingly requires statistical analysis and various management science techniques.Fixed Income Mathematics presents all market participants with the information they will need to understand the latest methodologies for evaluating any fixed income security - those we know about today and those that we will assuredly see in the future - and for understanding the latest trading and portfolio strategies.
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