Tuckman, Bruce.

Bibliographic record and links to related information available from the Library of Congress catalogPart One THE RELATIVE PRICING OF TRADITIONAL FIXED INCOME SECURITIES 1 Chapter 1 Bond Prices and Discount Factors3 The Time Value of Money3 Treasury Bond Quotations4 Discount Factors5 Arbitrage and the Law of One Price7 Bid-Ask Spreads and the Law of One Price9 Treasury STRIPS 10 Questions 13 Appendix IA Calculating the Replicating Portfolio and Deriving Arbitrage-Free Price Bounds 14 Chapter 2 Bond Prices and Interest Rates: Spot and Forward 17 Semiannual Compounding 17 Spot Rates 19 Forward Rates 22 Application: Short-Term vs. Long-Term Bond Prices 26 Application: Short-Term vs. Long-Term Bond Returns 27 Questions 30 Appendix 2A On the Relations between Spot Rates, Forward Rates, and the Slope of the Term Structure 3 1 Chapter 3 Yield-to-Maturity 33 Definition and Comments 33 The Coupon Effect 36 Yield-to-Maturity and Realized Return 39 Questions 40 Chapter 4 Real Data Issues 41 Coupons in the Midst of Semiannual Intervals 42 An Introduction to Smoothing Techniques 45 Examples of Smoothing Techniques 48 Questions 55 Appendix 4A Rate Calculations When Cash Flows Occur in the Midst of Semiannual Intervals and Continuous Compounding 56 Appendix 4B Least Squares and Least Absolute Deviations 58 Appendix 4C Piecewise Cubics 60 Part Two THE RELATIVE PRICING OF INTEREST RATE CONTINGENT CLAIMS 63 Introduction 63 Chapter 5 An Introduction to Arbitrage-Free Pricing of Derivatives 67 Questions 72 Chapter 6 Risk-Neutral Pricing 73 Questions 76 Chapter 7Arbitrage-Free Pricing in a Realistic Setting 77 Questions 86 Chapter 8 The Art of Term-Structure Modeling 89 The Ho-Lee Model 90 The Original Salomon Brothers Model 96 The Black-Derman-Toy Model 102 The Black-Karasinski Mode 106 Questions 109 Chapter 9 Equilibrium vs. Arbitrage-Free Models ill Part Three MEASURES OF PRICE SENSITIVITY 115 Introduction 115 Chapter 10 The Price-Rate Function and its Derivative 117 Questions 121 Chapter 11 Measures of Price Sensitivity 123 The Price Value of a Basis Point 123 Duration 126 Convexity 129 The Cost of Convexity 134 Questions 137 Appendix I IA The Duration and Convexity of a Portfolio t37 Chapter 12 Macaulay and Modified Duration 139 Derivations and Definitions 139 An Example 143 Duration: Analysis and Intuition 146 Convexity: Analysis and Intuition 150 Questions 153 Appendix 12A Special Cases of Duration 153 Chapter 13 Key Rate Durations 157 Multi-Factor Models and Duration t57 Key Rate Durations 159 Questions 166 Part Four SELECTED APPLICATIONS 169 Chapter 14 Forward and Futures Contracts 171 The Pricing of Forward Contracts 171 Identifying the Underlying Security 176 Marking-to-Market and the Pricing of Futures Contracts 177 Term-Structure Models and Futures Prices 180 Delivery Options and the Cheapest to Deliver 182 Conclusion 188 Questions 189 Chapter 15 Floaters and Inverse Floaters 191 'Me Price and Duration of Floaters 191 A Primer on Inverse Floaters 193 Questions 194 Chapter 16 Interest Rate Swaps 197 Description 197 Price and Price Sensitivity 198 Credit Risk and Swaps 200 LIBOR as the Floating Rate Index 201 Zero Sum Games and the Swaps Market 203 Questions 206 Chapter 17 The Options Embedded in Corporate Bonds 209 The Call Provision 209 Pricing Callable Bonds with a Term-Structure Model 213 A Graphical Analysis of Callable Bonds 219 Sinking Fund Basics 224 The Partial Call 229 Conclusion 234 Questions 234 Chapter 18 Mortgage-Backed Securities 237 Basic Mortgage Math 237 The Prepayment Option in Theory 241 T'he Prepayment Option in Practice 246 Mortgage Pricing Models 248 Price-Yield Curves of Mortgage Pass-Throughs and Selected Derivatives 254 Questions 260 References 261 Index 263