Fixed Income Analysis, Second Edition

1

See the preface to this book regarding rounding.

2

LIBOR is the interest rate which major international banks offer each other on Eurodollar certificates of deposit.

3

In the fixed income market, market participants refer to changes in interest rates or differences in interest rates in terms of basis points. A basis point is defined as 0.0001, or equivalently, 0.01%. Consequently, 100 basis points are equal to 1%. (In our example the coupon formula can be expressed as 1-month LIBOR + 1%.) A change in interest rates from, say, 5.0% to 6.2% means that there is a 1.2% change in rates or 120 basis points.

4

In the agency, corporate, and municipal markets, inverse floaters are created as structured notes. We discuss structured notes in Chapter 3. Inverse floaters in the mortgage-backed securities market are common and are created through a process that will be discussed in Chapter 10.

5

The issuer hedges by using financial instruments known as derivatives, which we cover in later chapters.

6

In Chapter 3, we will describe other types of floating-rate securities.

7

These offbeat coupon bond formulas are actually created as a result of inquiries from clients of dealer firms. That is, a salesperson will be approached by fixed income portfolio managers requesting a structure be created that provides the exposure sought. The dealer firm will then notify the investment banking group of the dealer firm to contact potential issuers.

8

As explained in Chapter 2, high credit quality ...