Financial Market Rates and Flows

This text provides a conceptual basis from which to understand interest rates, how they behave with changing market conditions, and how risk can be managed.

Features

• NEW—Treatment of credit risk.
• • Presents students with information on the treatment of credit ratings, default losses and migration patterns, quality yield spreads over time, high-yield debt, yield spreads with respect to maturity, together with a new section on liquidity.
• NEW—Updated data on the flow of funds (Ch. 2).
• • Offers students new information regarding the total debt outstanding for various major sectors of the economy.
• NEW—Reworked chapter on inflation and returns.
• • Introduces students to a section on inflation-indexed bonds and Treasury TIPS.
• NEW—Improved chapter on the term structure of interest rates (Ch. 6).
• • Familiarizes students with modeling the term structure as well as with relevant empirical work.
• NEW—Detailed treatment of bond portfolio management.
• • Illustrates for students the arbitrage efficiency between zero-coupon and coupon bonds with an actual situation.
• NEW—Expanded chapter on credit derivative securities.
• • Enables students to explore a very important market that is continually developing.
• NEW—Rewritten chapter on mortgage securities—Covers mortgage derivatives; modeling prepayments; and “TBA” pricing.
• • Reflects important changes in mortgage-backed securities.
• NEW—Reorganized treatment of municipal bonds.
• • Helps explain to students the nature of the market and the valuation of municipals in relation to taxable bonds.
• Emphasis on financial risk management throughout.
• • Introduces students to its relation to volatility, call risk, and default risk.
• Current developments—E.g., interest rates; financial institutions; and financial innovations.
• • Gives students a presentation that reflects the latest shifts in the financial markets.
• Extensive exploration into currency risk.
• • Shows students how it affects a foreign bond portfolio.
• Institutional content is not presented as separate chapters but in conjunction with risk and practice concepts.
• • Provides a more lively approach than chapter-by-chapter institutional descriptions.

Contents

1. The Function of Financial Markets.
2. The Flow-of-Funds System.
3. Foundations for Interest Rates.
4. Prices and Yields for Bonds and Money Market Instruments.
5. Inflation and Returns.
6. The Term Structure of Interest Rates.
7. Price Volatility, Coupon Rate, and Maturity.
8. Default and Liquidity Risk.
9. Derivative Securities: Interest-Rate Futures and Forward Contracts.
10. Derivative Securities: Options.
11. Derivative Securities: Interest-Rate and Credit Swaps.
12. Embedded Options and Option-Adjusted Spreads.
13. Mortgage Securities and Prepayment Risk.
14. Controlling Currency Risk.
15. The Influence of Taxes.
16. The Social Allocation of Capital.
Index.