The Management of Bond Investments and Trading of Debt
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Table of contents
- Cover
- Copyright Pageiv
- Contentsv
- Prefacexi
- Part 1: The dynamics of debt, leverage, and globalization1
- Chapter 1. Democratization of lending and socialization of risk3
- 1.1 Introduction3
- 1.2 The shift in economic activity4
- 1.3 Creativity, innovation, and tax incentives8
- 1.4 Debt and unsustainable leverage11
- 1.5 Leverage, common risk, and strategic risk14
- 1.6 Debt management challenges18
- 1.7 Controlling the speed limit of an economy20
- Chapter 2. Trading debt in a globalized economy25
- 2.1 Introduction25
- 2.2 Forces propelling economic growth27
- 2.3 Capital flows and impact of globalization on economic development30
- 2.4 The macro-dimension of financial markets33
- 2.5 Upside and downside of hedging36
- 2.6 Wealth creation requires an open and transparent financial market39
- 2.7 Mercantilism is not a good strategy in an economy of mounting debt43
- Part 2: The bondholder’s options, risks, and rewards47
- Chapter 3. Bonds defined49
- 3.1 Introduction49
- 3.2 An introduction to types of bonds51
- 3.3 Markets and issuers of bonds54
- 3.4 Bond market and equity market59
- 3.5 Yield of fixed income instruments and the ECB model62
- 3.6 Credit spread risk and other risks64
- 3.7 A bird’s-eye view of foreign exchange risk67
- 3.8 Bond restructuring and arbitrage70
- Appendix 3. A The ECB algorithm73
- Chapter 4. Convertible bonds, zero bonds, junk bonds, strips, and other bonds75
- 4.1 Introduction75
- 4.2 Straight and callable bonds76
- 4.3 Zero-coupon bonds79
- 4.4 Convertible bonds82
- 4.5 The Bloomberg model for portfolio value-at-risk83
- 4.6 Junk bonds and credit derivatives85
- 4.7 High-high risk bonds87
- 4.8 The stripping of bonds88
- 4.9 Brady bonds and Rubin bonds90
- 4.10 Chameleon bonds, Samurai bonds, and unwanted consequences92
- Chapter 5. Choosing bonds95
- 5.1 Introduction95
- 5.2 Investors can never be too careful96
- 5.3 Price formation for bonds100
- 5.4 Euroland and lessons from Eurodollars103
- 5.5 Euroland and bond market compliance105
- 5.6 Return on capital for bondholders108
- 5.7 Disincentives in holding bonds111
- 5.8 Taxation and debt instruments113
- 5.9 The camel is a horse designed by a committee115
- Chapter 6. Bank loans and securitization119
- 6.1 Introduction119
- 6.2 Determination of bank lending rates121
- 6.3 Panics and their aftermath125
- 6.4 China’s credit policies: a case study127
- 6.5 Bank regulation and risk control129
- 6.6 The confirmation of Basel II133
- 6.7 An introduction to securitization135
- 6.8 Securitization as a mechanism for risk transfer?137
- 6.9 A bridge too far in democratization of lending139
- Part 3: Interest rates, yields, and duration143
- Chapter 7. The dynamics of interest rates145
- 7.1 Introduction145
- 7.2 Who sets interest rates?146
- 7.3 Effect of interest rate hikes on the market150
- 7.4 Interest rates, net asset value, and present value152
- 7.5 What’s the purpose of rock-bottom interest rates?156
- 7.6 The shape of interest rate curves160
- 7.7 Modeling the volatility of interest rate premium164
- Chapter 8. Inflation indexing and impact of government deficits168
- 8.1 Introduction168
- 8.2 Money is merchandise with great leveraging169
- 8.3 Who pays for the shortfall in interest rates?173
- 8.4 Convergence and divergence in inflationary patterns176
- 8.5 An important BIS study on deflation178
- 8.6 Debt financing by the public sector181
- 8.7 Government borrowing, money supply, and interest rates184
- 8.8 Inflation-indexed securities187
- 8.9 Choices necessary to overcome accounting insufficiency190
- Appendix 8.A The Deutsche Bundesbank algorithm192
- Chapter 9. Bond yields and benchmark government bonds194
- 9.1 Introduction194
- 9.2 Algorithms for computation of yield195
- 9.3 Yield estimates, basis points, and yield curves199
- 9.4 Nominal, real, and natural interest rates, and inflation-indexing203
- 9.5 Fisher parity of nominal and real interest rates207
- 9.6 US Treasuries as benchmarks, futures, and forwards trading210
- 9.7 The Federal Open Market Committee, Fed funds rate, and discount rate212
- Appendix 9.A Yield of fixed interest bonds, with annual interest payment and maturity in n years216
- Appendix 9.B Yield of fixed interest bonds: an alternative computational procedure based on cash flo217
- Appendix 9.C Fisher parity algorithm linking nominal and real interest rates219
- Appendix 9.D The ISMA algorithm for narrowly defined effective rate219
- Appendix 9.E Brief list of symbols frequently used in Chapters 7, 8, and 9220
- Chapter 10. Maturity and duration221
- 10.1 Introduction221
- 10.2 Duration defined223
- 10.3 Modified duration and price sensitivity225
- 10.4 Macaulay’s duration algorithm227
- 10.5 Results obtained with duration versus maturity230
- 10.6 Practical applications of duration and convexity232
- Appendix 10.A Macaulay’s algorithm for calculating duration of a fixed rate instrument236
- Appendix 10.B Present value approach to computation of duration237
- Appendix 10.C Modified duration and effective duration237
- Appendix 10.D A duration algorithm accounting for purchase price of the bond238
- Appendix 10.E Concavity and convexity238
- Part 4: Bonds, bond markets, credit rating, and risk control241
- Chapter 11. Bonds, money markets, capital markets, and financial organizations243
- 11.1 Introduction243
- 11.2 Growth of the bond market246
- 11.3 Importance of the money market249
- 11.4 Importance of the capital market252
- 11.5 Capital allocation in fixed income instruments255
- 11.6 The biggest assets of a bank: a management perspective257
- 11.7 Need for forward planning and decisive action262
- Chapter 12. Credit quality and independent rating agencies267
- 12.1 Introduction267
- 12.2 Independent credit rating agencies269
- 12.3 Main players in credit rating in the global market272
- 12.4 Credit assessment, credit monitoring, and asymmetry of information275
- 12.5 The process of bond rating279
- 12.6 A frame of reference for loans quality and creditworthiness282
- 12.7 Risk-adjusted return on capital285
- Appendix 12.A An algorithm linking prime rate, higher up rates, and the acid test288
- Chapter 13. Case studies on credit quality290
- 13.1 Introduction290
- 13.2 Large financial institutions and their assets291
- 13.3 Bank failures: the case of Penn Square294
- 13.4 Commercial paper turning to ashes: the case of Penn Central296
- 13.5 The bankruptcy of Asia Pulp & Paper299
- 13.6 Banks can be light-hearted in evaluating credit risk301
- 13.7 A case of creditworthiness: investing in oil companies and their oil reserves303
- Chapter 14. Market risk with bonds308
- 14.1 Introduction308
- 14.2 A broader view of market risk309
- 14.3 Interest rate bubbles and bond market meltdown312
- 14.4 Measuring exposure to interest rate risk315
- 14.5 Reporting to regulators: an example from the Office of Thrift Supervision317
- 14.6 Risk points and exposure patterns319
- 14.7 Broadening interest rate exposure and mismatch risk322
- 14.8 Hedging interest rate risk in a commercial bank325
- 14.9 Stress testing for interest rate and forex risk, according to the Basel Committee327
- Appendix 14.A The Basel Committee’s approach to control of interest rate risk and optionality330
- Chapter 15. The control of risk under Basel II333
- 15.1 Introduction333
- 15.2 Risk management defined335
- 15.3 Basel II requirements for financial analysis and business analysis338
- 15.4 Enterprise risk management and internal control342
- 15.5 Risks investors take with asset managers345
- 15.6 The cost of legal risk and reputational risk348
- 15.7 Operational risk with trusteeship, mutual funds, and hedge funds351
- 15.8 White collar crime hits stakeholders hard353
- Index357
Written for managers and professionals in business and industry, and using a minimum of mathematical language, The Management of Bond Investments and the Trading of Debt addresses three key issues:
Financial expert Dimitris Chorafas discusses these issues in straightforward language for managers and professionals in commercial banks, securities houses, financial services companies, merchandising firms, manufacturing companies, and consulting firms, placing the mathematical treatment of the issues in the appendices, available for study but not necessary for understanding the business issues addressed in the book.
Focuses on new issues of central importance in bond and debt trading today
Uses clear, straightforward language for managers and professionals in business and industry, with mathematical treatment provided in appendices
Thorough treatment of operational risk new to books on this topic
- Bondholder’s options, risks and rewards in making investments in debt instruments;
- The dynamics of inflation, and how they affect both trading in the bond market, and investment decisions; and
- The democratization of lending, socialization of risk, and effect of the global economy on the bond market.
Financial expert Dimitris Chorafas discusses these issues in straightforward language for managers and professionals in commercial banks, securities houses, financial services companies, merchandising firms, manufacturing companies, and consulting firms, placing the mathematical treatment of the issues in the appendices, available for study but not necessary for understanding the business issues addressed in the book.