Preface xxiii
Acknowledgments xxv
Contributors xxvii
PART ONE
BACKGROUND
Chapter 1
Overview of the Types and Features of Fixed Income Securities 3
Frank J. Fabozzi, Michael G. Ferri, and Steven V. Mann
Bonds 3
Preferred Stock 15
Residential Mortgage-Backed Securities 16
Commercial Mortgage-Backed Securities 19
Asset-Backed Securities 19
Summary 20
Chapter 2
Risks Associated with Investing in Fixed Income Securities 21
Ravi F. Dattatreya and Frank J. Fabozzi
Market, or Interest-Rate, Risk 22
Reinvestment Risk 22
Timing, or Call, Risk 23
Credit Risk 24
Yield-Curve, or Maturity, Risk 25
Inflation, or Purchasing Power, Risk 26
Liquidity Risk 26
Exchange-Rate, or Currency, Risk 27
Volatility Risk 28

Political or Legal Risk 28
Event Risk 29
Sector Risk 29
Other Risks 29
Summary 29
Chapter 3
The Primary and Secondary Bond Markets 31
Frank J. Fabozzi and Frank J. Jones
Primary Market 31
Secondary Markets 39
Summary 51
Chapter 4
Bond Market Indexes 53
Frank K. Reilly and David J. Wright
Uses of Bond Indexes 53
Building and Maintaining a Bond Index 55
Description of Alternative Bond Indexes 56
Risk/Return Characteristics 61
Correlation Relationships 65
Summary 70
PART TWO
BASIC ANALYTICS
Chapter 5
Bond Pricing, Yield Measures, and Total Return 73
Frank J. Fabozzi
Bond Pricing 73
Conventional Yield Measures 86
Total Return Analysis 97

Summary 105
Chapter 6
Calculating Investment Returns 107
Bruce J. Feibel
Single-Period Rate of Return 108
Performance of an Investment: Money-Weighted Returns 119

Performance of the Investment Manager: Time-Weighted Returns 125
Multiple-Period Return Calculation 129
Summary 133
Chapter 7
The Structure of Interest Rates 135
Frank J. Fabozzi
The Base Interest Rate 135
Risk Premium 135
The Term Structure of Interest Rates 139
Summary 156
Chapter 8
Overview of Forward Rate Analysis 159
Antti Ilmanen
Computation of Par, Spot, and Forward Rates 160
Main Influences on the Yield-Curve Shape 163
Using Forward Rate Analysis in Yield-Curve Trades 171
Chapter 9
Measuring Interest-Rate Risk 183
Frank J. Fabozzi, Gerald W. Buetow, Jr., and Robert R. Johnson

The Full-Valuation Approach 184
Price Volatility Characteristics of Bonds 188
Duration 197
Modified Duration versus Effective Duration 203
Convexity 210
Price Value of a Basis Point 222
The Importance of Yield Volatility 225

PART THREE
SECURITIES
Chapter 10
U.S. Treasury and Agency Securities 229
Frank J. Fabozzi and Michael J. Fleming
Treasury Securities 229
Agency Securities 242
Summary 250

Chapter 11
Municipal Bonds 251
Sylvan G. Feldstein, Frank J. Fabozzi, Alexander M. Grant, Jr., and
Patrick M. Kennedy
Features of Municipal Securities 253
Types of Municipal Obligations 255
The Commercial Credit Rating of Municipal Bonds 264
Municipal Bond Insurance 270
Valuation Methods 271
Tax Provisions Affecting Municipals 272
Yield Relationships within the Municipal Bond Market 276
Primary and Secondary Markets 278
Bond Indexes 279
Official Statement 280
Regulation of the Municipal Securities Market 280
Chapter 12
Private Money Market Instruments 285
Frank J. Fabozzi, Steven V. Mann, and Richard S. Wilson
Commercial Paper 285
Bankers Acceptances 289
Large-Denomination Negotiable CDs 292
Repurchase Agreements 295
Federal Funds 301
Summary 303
Chapter 13
Corporate Bonds 305
Frank J. Fabozzi, Steven V. Mann, and Richard S. Wilson
The Corporate Trustee 306
Some Bond Fundamentals 307
Security for Bonds 312
Alternative Mechanisms to Retire Debt before Maturity 320
Credit Risk 327
Event Risk 330
High-Yield Bonds 331
Default Rates and Recovery Rates 335
Chapter 14
Medium-Term Notes 339
Leland E. Crabbe
Background of the MTN Market 340
Mechanics of the Market 342
The Economics of MTNs and Corporate Bonds 344
Structured MTNs 347
Euro-MTNs 349
Chapter 15
Inflation-Linked Bonds 351
John B. Brynjolfsson
Mechanics and Measurement 353
Marketplace 361
Valuation and Performance Dynamics 364
Investors 364
Issuers 369
Other Issues 371
Conclusion 372
Chapter 16
Floating-Rate Securities 373
Frank J. Fabozzi and Steven V. Mann
General Features of Floaters and Major Product types 374

Call and Put Provisions 376
Spread Measures 377
Price Volatility Characteristics of Floaters 379
Portfolio Strategies 382
Chapter 17
Nonconvertible Preferred Stock 385
Frank J. Fabozzi and Steven V. Mann
Preferred Stock Issuance 386
Preferred Stock Ratings 390
Tax Treatment of Dividends 392

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