Contents
AbouttheAuthors xix
Preface xxi
Acknowledgments xxv
Notation xxvii
PARTI
INVESTMENTENVIRONMENT
1BondsandMoney-MarketInstruments3
1.1Bonds 3
1.1.1GeneralCharacteristicsofBonds 3
1.1.2BondsbyIssuers 17
1.2Money-MarketInstruments 25
1.2.1Definition 25
1.2.2TheRoleoftheCentralBank 25
1.2.3T-Bills 26
1.2.4CertificatesofDeposit 28
1.2.5Bankers’Acceptances 29
1.2.6CommercialPapers 29
1.2.7InterbankDeposits 30
1.2.8RepoandReverseRepoMarketInstruments 30
1.3EndofChapterSummary 32
1.4ReferencesandFurtherReading 33
1.4.1BooksandPapers 33
1.4.2WebsitesandOthers 33
1.5Problems 34
1.5.1ProblemsonBonds 34
1.5.2ProblemsonMoney-MarketInstruments 36
1.6Appendix:SectorBreakdownoftheEuro,theUKandtheJapan
CorporateBondMarkets 37
2BondPricesandYields41
2.1IntroductiontoBondPricing 41
2.2PresentValueFormula 43
2.2.1Time-ValueofMoney 43
2.2.2TheMathematicsofDiscounting 43
2.2.3NominalversusRealInterestRates 45
2.2.4TimeBasisandCompounding
FrequencyConventions 46
2.2.5ContinuousCompounding 47
2.3TaxonomyofRates 49
2.3.1CouponRateandCurrentYield 49
2.3.2YieldtoMaturity 49
2.3.3SpotZero-Coupon(orDiscount)Rate 51
2.3.4ForwardRates 52
2.3.5BondParYield 54
2.4EndofChapterSummary 54
2.5ReferencesandFurtherReading 54
2.6Problems 55
PARTII
TERMSTRUCTUREOFINTERESTRATES
3EmpiricalPropertiesandClassicalTheoriesoftheTermStructure63
3.1DefinitionandPropertiesoftheTermStructure 63
3.1.1WhatKindofShapeCanItTake? 65
3.1.2HowDoesItEvolveoverTime? 68
3.2ClassicalTheoriesoftheTermStructure 81
3.2.1ThePureExpectationsTheory 82
3.2.2ThePureRiskPremiumTheory 83
3.2.3TheMarketSegmentationTheory 85
3.2.4TheBiasedExpectationsTheory:
AnIntegratedApproach 86
3.2.5IllustrationandEmpiricalValidation 86
3.2.6SummaryandExtensions 87
3.3EndofChapterSummary 88
3.4ReferencesandFurtherReading 89
3.4.1OntheEmpiricalBehavioroftheYieldCurve 89
3.4.2OnthePrincipalComponentAnalysis
oftheYieldCurve 90
3.4.3OntheClassicalTheoriesoftheTermStructure
ofInterestRates 90
3.5Problems 91
4DerivingtheZero-CouponYieldCurve96
4.1DerivingtheNondefaultTreasuryZero-CouponYieldCurve 96
4.1.1HowtoSelectaBasketofBonds? 96
4.1.2DirectMethods 97
4.1.3IndirectMethods 103
4.2DerivingtheInterbankZero-CouponRateCurve 130
4.2.1HowtoSelecttheBasketofInstruments? 130
4.2.2InterpolationMethods 132
4.2.3LeastSquaresMethodsBasedonRates 132
4.2.4LeastSquaresMethodsBasedonPrices 133
4.3DerivingCreditSpreadTermStructures 136
4.3.1DisjointMethods 136
4.3.2JointMethods 137
4.4EndofChapterSummary 142
4.5ReferencesandFurtherReading 144
4.6Problems 146
4.7Appendix:AUsefulModifiedNewton’sAlgorithm 155
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