Bruce Tuckman - Fixed Income Securities: Tools for Todays Markets

Additional Praise for
Fixed Income Securities: Tools for Today's Markets, 3rd Edition

The coverage of fixed income markets and instruments is even better than in previous editions while the book retains the same clarity of exposition via extensive, carefully worked examples. An outstanding textbook that is extensively used by practitioners is something special. This is indeed the standout text on fixed income.

Stephen M. Schaefer, Professor of Finance, London Business School

This is a terrific reference text that combines a strong conceptual framework with real-world pricing and hedging applications. It is a must-read for any serious investor in fixed income markets.

Terry Belton, Global Head of Fixed Income Research, JPMorgan

This outstanding book achieves the perfect balance between presenting the foundational principles of fixed income markets and providing interesting and insightful practical applications. This classic is required reading for anyone interested in understanding fixed income markets.

Francis Longstaff, Allstate Professor of Insurance and Finance, The Anderson School at UCLA

This is a great book. It covers the most current issues in fixed income and reflects the authors' deep understanding of the markets grounded in the theory of finance and many years of practical experience.

Ardavan Nozari, Treasurer, Citigroup Global Markets Holding Inc.

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Copyright 2012 by Bruce Tuckman and Angel Serrat. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Tuckman, Bruce.
Fixed income securities : tools for today's markets / Bruce Tuckman, Angel Serrat. 3rd ed.
p. cm. (Wiley finance series)
Includes index.
ISBN 978-0-470-89169-8 (hardback)
ISBN 978-0-470-90403-9 (paperback); ISBN 978-1-118-13394-1 (ebk);
ISBN 978-1-118-13395-8 (ebk); ISBN 978-1-118-13396-5 (ebk)
1. Fixed-income securities. I. Serrat, Angel. II. Title.
HG4650.T83 2012
332.632044dc23
2011037178

Preface to the Third Edition

The goal of this book is to present conceptual frameworks for pricing and hedging a broad range of fixed income securities in an intuitive, mathematically simple, and applied manner. Conceptual frameworks are necessary so as to connect ideas across products and to learn new material more easily. An intuitive and mathematically simple approach is certainly useful to students and practitioners without very advanced mathematical training, but it is also really a good way for everyone to learn new material. Finally, an applied approach is crucial for several reasons. First, examples go a long way in solidifying conceptual understanding. The introduction of practically every concept in this book is followed by an example taken from the markets or, at the very least, by an appropriately calibrated example. Second, important details emerge from applications. Third, only by working through real or realistic examples can orders of magnitude be learned and appreciated. For example, a study of DV 01 is not complete without having absorbed that the sensitivity of a 10-year bond is about 8 cents per 100 face amount per basis point, as opposed to 0.8 cents, 80 cents, or 8 dollars.

The book begins with an Overview of global fixed income markets. This section provides institutional descriptions of securities and market participants along with data designed to illustrate absolute and relative sizes of markets and players. A well-informed fixed income market professional has some idea about how central banks around the world have reacted to the financial crisis of 20072009 and can say whether the size of the mortgage market in the United States is one-tenth the size of GDP, about equal to GDP, or 10 times GDP.

For securities with fixed cash flows, Part One of the book presents the relationships across prices, spot rates, forward rates, returns, and yields. The fundamental notion of arbitrage pricing is introduced and is central to the analysis. Part Two describes how to measure and hedge interest rate risk, covering one-factor metrics, namely, DV 01, duration, and convexity (in both their general and yield-based forms); two-factor metrics like key-rate 01s, partial PV 01s, and forward bucket 01s; and empirical methods like regression and principal component analysis.

Part Three turns to the arbitrage pricing of contingent claims, i.e., of securities with cash flows that depend on interest rates, like options. The science of arbitrage pricing in this context is followed by a framework in which to think about the shape of the term structure of interest rates in terms of expectations, risk premium, and convexity. One-factor term structure models are then described, to be used both in their own right, when appropriate, and as building blocks toward more sophisticated models. Chapter 11, the last chapter in Part Three, has two parts. First, it presents a multi-factor model for use in relative value applications, along with suggestions for estimating its parameters empirically. Second, it introduces the LIBOR Market Model, an extremely popular model for pricing exotic derivatives, in a particularly accessible manner.