Contents
1 If you are so smart, why ain’t you rich? 6
2 Consumption-Based model 7
2.1 Marginal rate of substitution/stochastic discount factor . . . . . . . . . . 11
2.2 Risk Corrections - The CAPM . . . . . . . . . . . . . . . . . . . . . . . 13
3 Fixed Income Markets 15
3.1 Compounding interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4 Money Markets - Time conventions 18
4.1 Money Markets - Instruments . . . . . . . . . . . . . . . . . . . . . . . . 19
4.2 Money Markets - Time Deposit . . . . . . . . . . . . . . . . . . . . . . . 20

5 The Yield to Maturity 21
5.1 Problems with YTM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.2 Factors increasing reinvestment risk . . . . . . . . . . . . . . . . . . . . 25
6 Measuring Bond Risk 28
6.1 Measuring Risk - The Uses and Limits of Volatility . . . . . . . . . . . . 29
6.2 Measuring Risk - Is Volatility Risky? . . . . . . . . . . . . . . . . . . . . 30
6.3 Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.4 Measuring Risk - The empirical Rule (68%)? . . . . . . . . . . . . . . . 32
6.5 Measuring Risk - The empirical Rule (95%)? . . . . . . . . . . . . . . . 33
6.6 Measuring Risk - Is the Equity Market Normaly Distributed? . . . . . . . 34
6.7 Measuring Risk - Correlation and Corresterol . . . . . . . . . . . . . . . 35
6.8 Measuring Risk - Joint Distribution . . . . . . . . . . . . . . . . . . . . 36
6.9 Measuring Risk - Joint Distribution . . . . . . . . . . . . . . . . . . . . 37

6.10 Measuring Risk - Methods of Calculating VAR . . . . . . . . . . . . . . 38
7 Changes in the Yield Curve 39
8 Duration Measures 42
9 Negative Convexity 46
10 Why use T-Bond futures 49
11 Impact of Futures on Duration for a Fixed income investor 50
12 Changing the duration of a Portfolio 51
13 Bond Portfolio Management 53
14 Benefits of Indexing 54
4 EDHEC Thomas

15 Primary Risk Factors 55
16 Biblio 56