Fixed Income Markets: Management, Trading and Hedging, 2nd Edition

PART One Introduction to Bonds

In Part One, we describe the key concepts in fixed-income market analysis, which cover the basics of the bond instrument. The building blocks described here are generic and are applicable in any market. The analysis is simplest when restricted to plain-vanilla default-free bonds; as the instruments become more complex, we are required to introduce additional techniques and assumptions. Part One comprises five chapters. We begin with bond pricing and yield, followed by traditional interest-rate risk measures such as modified duration and convexity. This is followed by a look at spot and forward rates, the derivation of such rates from market yields, and the concept of the yield curve. Yield-curve analysis and the modelling of the term structure of interest rates is one of the most heavily researched areas of financial economics. The treatment here is kept as concise as possible, which sacrifices some detail, but bibliographies at the end of each chapter will direct interested readers to what are the most accessible and readable references in this area.

While we do not describe specifics of particular markets, it is important to remember that the general concepts discussed here are pertinent to debt markets in every jurisdiction.