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particularly since every financial product is affected by each of these ele-
ments. And for securities in the form of spot, a forward or future, or an
option, these structures certainly share much in common across each and
every type of financial instrument that they embody.
Perhaps the real conclusion here is that there is no conclusion, that read-
ers are now in possession of a new toolbox filled with fresh perspectives of
the marketplace, and as such are fully equipped to better understand exist-
ing products as well as engineer a financial innovation or two of their own.
Good luck to you!




TLFeBOOK
TLFeBOOK
Index

ARMs. See Adjustable-rate
401k plans. See Retirement
mortgages
accounts
Asset-backed bonds, 91
529 plans. See College savings
Asset-backed instruments, 135fn
accounts
Asset-backed securities, 91, 103,
A 134“135
servicer, 91
A tranches, 141
Asset-backed securities (ABSs),
Absolute return
types, 262
fund, 150
Asset-liability management, 156
investing, 150“153
Asset-liability portfolio
ABSs. See Asset-backed securities
management, 156
Accept delivery, 46
Assets
Add-on, usage, 260
market value, 202
Adjustable-rate mortgages
stream, 156
(ARMs), 164“165
volatility, 202
Agency bonds, 245
Asymmetrical information, 203
taxable status. See U.S. federal
At-the-money
agency bonds
10“non-call-2, price
tax-adjusted total
volatility, 144
returns, 145t
call option, 215
Agency securities, tax-adjusted
option, 63fn, 210, 213
total returns, 244t
put, 208
Aggressive growth, 150
strike prices, 127
Alpha, 161
Available for sale, 259
American option, 145
Average life, 139
Annualization term, 18
prepayment rate,
Appreciation, 8. See also Credit-
contrast, 139f
related appreciation
sensitivity test, 262
Arbitrage. See Fixed income;
tests, 262
Market neutral




271

TLFeBOOK
272 INDEX


Black-Scholes application, 72f
B
Black-Scholes assumption. See
B tranches, 141
Log-normality
Backed-out. See Implied forward
Black-Scholes option pricing
credit outlook
formula, 70
Bad debt, 24
Blue chip stocks, 30
Balanced funds, 155
Bond-equivalent basis, 173
Bank for International
Bond-equivalent yield, 25,
Settlements (BIS), 221,
174“175
259“260
Bonds. See Shorter-maturity
Bankruptcies, 4
bonds
scenario, 254
basis, 122f
Bankruptcy-remote entity, 93
basket, 121fn
Banks, liabilities, 156
cheapness/richness, 27fn
Basis points (bps), 8. See also
coupon value, accruing, 37
Total return
credit quality, 96f
gain, 52
futures, 45“47
Basis risk, 114
CTD, 123
Basis trade, 114“118, 210f
price, 46“47
creation, 114f
indices, investment-grade
Basle Committee (1993),
portion, 169
260“261
market, callable
Bear market environment, 102
structures, 129
Benchmark. See Market
portfolio construction, 234
quantitative measure, 163
price
risk, 238“240
risk, 172“182
security, 28
sensitivity, 189
Beta
products, optionality
definition, 183
variations, 134“150
industry types, 185f
statistical methods, 205
unity, value, 184
summary, 64
usage, 182“204
total returns, 232
Bid/offer spreads, 213
uncertainty, layers, 25fn
Binomial option model, tree, 59
yield curve. See U.S. Treasury
BIS. See Bank for International
Bonex bonds/securities, 86“87
Settlements




TLFeBOOK
273
Index



Canadian Treasury bills, 50“51
Bonex clause, 86“87
Book value, 31 Capital, 91“97
Bootstrapping effect, 43 adequacy, supervisory
Borrowings. See Longer-term review, 259
borrowings; Short-term allocation. See Risk
borrowings amount, availabililty, 217
Brady bonds, 159fn base, 155
credit benefits, 149 exposure, 159
Bullet bond, 70, 208 flight, 85
Business cycle, 5 gains. See Long-term capital
Busted PAC, 142 gains
Buy-and-hold-oriented guidelines/restrictions, 217.
investors, 244 See also Risk-based
capital guidelines
C impact. See Collateralization
preservation, 155
C tranches, 141
fund, 154
Call option, 133, 203f, 256. See
representation, 218
also At-the-money; Credit;
requirements, 259
Short call option; Synthetic
return. See Return on
call option
risk-adjusted capital;
calculation, 59t
Risk-adjusted return on
value, 53
risk-adjusted capital
Call payoff profile, 208f
structure, 92, 202
Call value, 54“55
value, 205
Callable bonds, 133, 149
Capital Asset Pricing Model
conceptual presentation, 130f
(CAPM), 219
creation, 129f
Capital-adjusted variables,
issuing, 130
219“220
payoff profile, 209
Carry (cost of carry), 35, 212.
price, definition, 199
See also Negative carry;
Callable structures. See Bonds
Positive carry
Callables, 200. See also Discrete
component, 189
callables
duration, relationship, 190f
price, 133
options, 119
Called away, 200




TLFeBOOK
274 INDEX


CDO. See Collateralized debt
Carry (cost of carry) (continued)
obligation
value, 116t, 118
Ceilings, 217
scenarios, 117f“119f
Central bank authorities, 41
zero value, 124
Century bonds, 3fn
Carter Bonds, 84
Certificate of deposit (CD),
Cash derivative, 92fn
6, 157
Cash flow-paying product
CFA. See Communaut©
type, 117
Financière Africaine
Cash flows, 3, 15. See also
Cheapest-to-deliver (CTD),
Investor-specific
115“118, 120fn. See also
cash flow
Bonds
appendix, 66“70
beneficial change, 121
combination, 209f
Cheapness/richness. See Bonds
diversification, 232
Chicago Board of Trade
interrelationships, 206“236
(CBOT), 77
intramouth, reinvestment, 165
10“year Treasury bond
priority, 202
future, 115
profiles, 65f
bond futures contract, 115
reinvestment, 226
delivery process, 115

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