Johnson R.S. - Debt Markets and Analysis

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Cover image: background Jamie Carroll/iStockphoto; chart courtesy of R. Stafford Johnson
Cover design: C. Wallace

Copyright 2013 by R. Stafford Johnson. 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:
Johnson, R. Stafford.
Debt markets and analysis / R. Stafford Johnson.
p. cm. (Bloomberg financial series)
Includes index.
ISBN 978-1-118-00000-7 (cloth); ISBN 978-1-118-22166-2 (ebk);
ISBN 978-1-118-26024-1 (ebk); ISBN 978-1-118-23543-0 (ebk)
1. Fixed-income securities. 2. Debt. 3. Bonds. 4. Securities. I. Title.
HG4650.J64 2013
332.632044dc23
2012030691

To my wife, Jan.

Preface

Over the past 20 years, the investment industry has seen stock market and real estate bubbles, the emergence of hedge funds and private equity companies, the globalization of financial markets, the proliferation of derivative securities, and the growth of securitized assets and structured financing. Mirroring these events have been the academic contributions to the investment discipline: the development of capital market theories, the derivation of option pricing models, and the explorations into efficient market theories. The financial events and the academic contributions together point out the challenges in mastering an understanding and developing a knowledge of investments and financial markets. In addition to the innovations in financial instruments, the investment and management of bonds and debt securities by financial and nonfinancial corporations has also experienced significant developments over the past two decades. Bond investors use strategies such as cash-flow matching, immunization, cell matching, contingent immunization, and bond selection based on forecasting yield curve shifts or the narrowing or widening of the quality yield spread. Many corporate borrowers, money managers, intermediaries, and bond portfolio managers have increased their use of futures, options, and swap contracts on debt securities as a hedge against interest rate and credit risk.

Today, managing fixed-income securities in this dynamic and innovative investment environment requires that professionals understand the debt markets and uses for an increasing number of securities, markets, strategies, and methodologies. In this increasingly complex environment, many practitioners manage their securities and portfolios using a Bloomberg terminal. Bloomberg is a computer information and retrieval system providing access to financial and economic data, news, and analytics. Bloomberg terminals are common on most trading floors and are becoming more common in universities where they are used for research, teaching, and managing student investment funds. Bloomberg is also the leader in data and information retrieval and analytical systems applicable to bond investment and management.

The purpose of this book is to provide finance students and professionals with a bond and debt management exposition that will take them from the basic bond investment theories and fundamentals that can be found in many investment books to a more detailed understanding of the markets and strategies. Given the widespread use of the Bloomberg system and its data and analytical systems that can be applied to bonds, this text also includes a detailed description of the Bloomberg system, a listing of many of the analytical functions that can be applied to fixed-income investment and management, and detailed explanations of how Bloomberg information and analytical functions can be applied to the fixed-income and debt market topics covered in the text. It is my hope that the synthesis of fundamental and advanced topics with Bloomberg information and analytics will provide professionals and students of finance with not only a better foundation in understanding the complexities and subtleties of the debt markets, but also with the ability to apply that understanding to real-world investment decisionsto grasp how it is done on the street.

The book is written for professionals in the investment industry involved in bond and debt management and MBA, MS, and undergraduate finance students. For professionals, the text can be used as a training and instructional source and as a guide on how to apply Bloomberg to debt markets and analysis. As a debt markets text for students, the book is designed for a one-semester debt markets course. The Bloomberg material is presented in boxes in each chapter, and Chapter 2 provides an overview and guide to the Bloomberg system.