The Management Of Bond Investments And Trading Of Debt

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ISBN: 9780750667265 | 0750667265
Cover: Hardcover
Copyright: 6/30/2005

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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: Bondholders 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.

Preface

Part 1: The dynamics of debt, leverage, and globalization

(46)

Democratization of lending and socialization of risk

(22)

Introduction

(1)

The shift in economic activity

(4)

Creativity, innovation, and tax incentives

(3)

Debt and unsustainable leverage

(3)

Leverage, common risk, and strategic risk

(4)

Debt management challenges

(2)

Controlling the speed limit of an economy

(5)

Trading debt in a globalized economy

(22)

Introduction

(2)

Forces propelling economic growth

(3)

Capital flows and impact of globalization on economic development

(3)

The macro-dimension of financial markets

(3)

Upside and downside of hedging

(3)

Wealth creation requires an open and transparent financial market

(4)

Mercantilism is not a good strategy in an economy of mounting debt

(4)

Part 2: The bondholder's options, risks, and rewards

(96)

Bonds defined

(26)

Introduction

(2)

An introduction to types of bonds

(3)

Markets and issuers of bonds

(5)

Bond market and equity market

(3)

Yield of fixed income instruments and the ECB model

(2)

Credit spread risk and other risks

(3)

A bird's-eye view of foreign exchange risk

(3)

Bond restructuring and arbitrage

(5)

Appendix 3.A The ECB algorithm

(2)

Convertible bonds, zero bonds, junk bonds, strips, and other bonds

(20)

Introduction

(1)

Straight and callable bonds

(3)

Zero-coupon bonds

(3)

Convertible bonds

(1)

The Bloomberg model for portfolio value-at-risk

(2)

Junk bonds and credit derivatives

(2)

High-high risk bonds

(1)

The stripping of bonds

(2)

Brady bonds and Rubin bonds

(2)

Chameleon bonds, Samurai bonds, and unwanted consequences

(3)

Choosing bonds

(24)

Introduction

(1)

Investors can never be too careful

(4)

Price formation for bonds

100

(3)

Euroland and lessons from Eurodollars

103

(2)

Euroland and bond market compliance

105

(3)

Return on capital for bondholders

108

(3)

Disincentives in holding bonds

111

(2)

Taxation and debt instruments

113

(2)

The camel is a horse designed by a committee

115

(4)

Bank loans and securitization

119

(24)

Introduction

119

(2)

Determination of bank lending rates

121

(4)

Panics and their aftermath

125

(2)

China's credit policies: a case study

127

(2)

Bank regulation and risk control

129

(4)

The confirmation of Basel II

133

(2)

An introduction to securitization

135

(2)

Securitization as a mechanism for risk transfer?

137

(2)

A bridge too far in democratization of lending

139

(4)

Part 3: Interest rates, yields, and duration

143

(98)

The dynamics of interest rates

145

(23)

Introduction

145

(1)

Who sets interest rates?

146

(4)

Effect of interest rate hikes on the market

150

(2)

Interest rates, net asset value, and present value

152

(4)

What's the purpose of rock-bottom interest rates?

156

(4)

The shape of interest rate curves

160

(4)

Modeling the volatility of interest rate premium

164

(4)

Inflation indexing and impact of government deficits

168

(26)

Introduction

168

(1)

Money is merchandise with great leveraging

169

(4)

Who pays for the shortfall in interest rates?

173

(3)

Convergence and divergence in inflationary patterns

176

(2)

An important BIS study on deflation

178

(3)

Debt financing by the public sector

181

(3)

Government borrowing, money supply, and interest rates

184

(3)

Inflation-indexed securities

187

(3)

Choices necessary to overcome accounting insufficiency

190

(4)

Appendix 8.A The Deutsche Bundesbank algorithm

192

(2)

Bond yields and benchmark government bonds

194

(27)

Introduction

194

(1)

Algorithms for computation of yield

195

(4)

Yield estimates, basis points, and yield curves

199

(4)

Nominal, real, and natural interest rates, and inflation-indexing

203

(4)

Fisher parity of nominal and real interest rates

207

(3)

US Treasuries as benchmarks, futures, and forwards trading

210

(2)

The Federal Open Market Committee, Fed funds rate, and discount rate

212

(9)

Appendix 9.A Yield of fixed interest bonds, with annual interest payment and maturity in n years

216

(1)

Appendix 9.B Yield of fixed interest bonds: an alternative computational procedure based on cash flow

217

(2)

Appendix 9.C Fisher parity algorithm linking nominal and real interest rates

219

(1)

Appendix 9.D The ISMA algorithm for narrowly defined effective rate

219

(1)

Appendix 9.E Brief list of symbols frequently used in Chapters 7, 8, and 9

220

(1)

Maturity and duration

221

(20)

Introduction

221

(2)

Duration defined

223

(2)

Modified duration and price sensitivity

225

(2)

Macaulay's duration algorithm

227

(3)

Results obtained with duration versus maturity

230

(2)

Practical applications of duration and convexity

232

(9)

Appendix 10.A Macaulay's algorithm for calculating duration of a fixed rate instrument

236

(1)

Appendix 10.B Present value approach to computation of duration

237

(1)

Appendix 10.C Modified duration and effective duration

237

(1)

Appendix 10.D A duration algorithm accounting for purchase price of the bond

238

(1)

Appendix 10.E Concavity and convexity

238

(3)

Part 4: Bonds, bond markets, credit rating, and risk control

241

(116)

Bonds, money markets, capital markets, and financial organizations

243

(24)

Introduction

243

(3)

Growth of the bond market

246

(3)

Importance of the money market

249

(3)

Importance of the capital market

252

(3)

Capital allocation in fixed income instruments

255

(2)

The biggest assets of a bank: a management perspective

257

(5)

Need for forward planning and decisive action

262

(5)

Credit quality and independent rating agencies

267

(23)

Introduction

267

(2)

Independent credit rating agencies

269

(3)

Main players in credit rating in the global market

272

(3)

Credit assessment, credit monitoring, and asymmetry of information

275

(4)

The process of bond rating

279

(3)

A frame of reference for loans quality and creditworthiness

282

(3)

Risk-adjusted return on capital

285

(5)

Appendix 12.A An algorithm linking prime rate, higher up rates, and the acid test

288

(2)

Case studies on credit quality

290

(18)

Introduction

290

(1)

Large financial institutions and their assets

291

(3)

Bank failures: the case of Penn Square

294

(2)

Commercial paper turning to ashes: the case of Penn Central

296

(3)

The bankruptcy of Asia Pulp & Paper

299

(2)

Banks can be light-hearted in evaluating credit risk

301

(2)

A case of creditworthiness: investing in oil companies and their oil reserves

303

(5)

Market risk with bonds

308

(25)

Introduction

308

(1)

A broader view of market risk

309

(3)

Interest rate bubbles and bond market meltdown

312

(3)

Measuring exposure to interest rate risk

315

(2)

Reporting to regulators: an example from the Office of Thrift Supervision

317

(2)

Risk points and exposure patterns

319

(3)

Broadening interest rate exposure and mismatch risk

322

(3)

Hedging interest rate risk in a commercial bank

325

(2)

Stress testing for interest rate and forex risk, according to the Basel Committee

327

(6)

Appendix 14.A The Basel Committee's approach to control of interest rate risk and optionality

330

(3)

The control of risk under Basel II

333

(24)

Introduction

333

(2)

Risk management defined

335

(3)

Basel II requirements for financial analysis and business analysis

338

(4)

Enterprise risk management and internal control

342

(3)

Risks investors take with asset managers

345

(3)

The cost of legal risk and reputational risk

348

(3)

Operational risk with trusteeship, mutual funds, and hedge funds

351

(2)

White collar crime hits stakeholders hard

353

(4)

Index

357

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