Fixed Income Analytics

The fixed income markets are central to the modern economy, and are arguably the most central and influential markets in the entire financial system. Indeed, interest rates, the most important prices in the entire economy, are set in the bond and money markets. A famous and colorful lament from then President-Elect Bill Clinton in 1993 led his aide, James Carville, to declare that in his next life he wanted to come back as something really influential: the bond market.

This Book, which assumes no knowledge of finance, and with minimal math requirements (business school calculus is more than enough) will be useful for financial professionals who wish to go to the next level with their understanding of the fixed income markets, and for quantitative professionals from other fields who are interested in learning something about finance. If you're looking for one segment of the capital markets to start an exploration of finance, you can't go wrong with the fixed income markets.

This Book teaches quantitative and rigorous techniques for pricing fixed income securities and for analyzing and managing the risks they are exposed to. We will develop techniques for the analysis of treasury bonds, treasury bills, strips, and repurchase agreements, as well as for bond portfolios.

More than any other asset class, fixed income securities are exposed to risks associated with interest rates. Moreover, the linkage between fixed income assets and interest rates is very tight. Thus, by necessity, we will also develop methods for the analysis of interest rates. We will explore the close linkage between fixed income instruments and interest rates, and we will review the main theories of interest rate term structure.

The pricing of fixed income securities is one of the core objectives of the Book. We will go well beyond pricing in the analysis of the risks fixed income securities are exposed to. We will treat the classic measures of interest rate risk: dollar duration, DV01, duration, and convexity, and we will see how to use them for real risk management applications.

In the end, everything in this Book is driven by applications, and there are applications galore. We will cover trading applications, like riding the yield curve and rate level trading. And we will study risk management techniques like immunization, and applications in asset/liability management.