Interest Rate Markets: A Practical Approach to Fixed Income

Introduction

The U.S. fixed income market, with securities worth trillions of dollars traded yearly, is one of the largest in the world. It attracts a wide variety of borrowers and investors, from individuals and corporations to governments. The market offers an array of instruments such as bonds, swaps, futures, and options for trading or managing risk. As the size and sophistication of the U.S. fixed income market has increased over the past two decades, so have the challenges and opportunities that come along with these instruments. Managing interest rate risk has become a crucial task for portfolio managers. Indeed, the various crises that punctuated the financial markets over the past two decades have underscored the importance of this task. Therefore, given the complexity of interest rate products and the range of macroeconomic factors that affect them, participants in the fixed income markets need to have frameworks for logical and in-depth analysis of trades and embedded risks.

Such a framework needs to be based on the principles of mathematical modeling as well as an intuitive grasp of the economy and monetary policy. Mathematical models are important because the contemporary fixed income market has numerous complex products that require quantitative foundations. Likewise, the knowledge of fundamentals is indispensable because markets are more integrated than ever before. However, the current literature on the U.S. fixed income market lacks the balance of these essential ...