This chapter lays the foundation for understanding the pricing of assets with credit risk by providing clear explanations of the time value of money, discount factors and treasury bonds in a default-free setting. Simple, easy-to-follow examples are used throughout the chapter.

This chapter continues to lay the foundation for understanding the pricing of assets with credit risk by providing explaining the time value of money with interest rates. Spot rates, term structure and forward rates and their derivation from bond prices are explained using both technical detail and simple, easy-to-follow ... click here for more details.

This chapter relaxes the convenient assumption that cash flows occur in even intervals and considers the reality of cash flows paid at any time, which requires consideration of accrued interest and general compounding conventions. The chapter builds further to explain estimation of discount rates for any horizon using curve ... click here for more details.

This chapter builds on the one-factor models explained in chapters 5 and 6 and explains two multi-factor approaches, namely key rate analysis and bucket analysis. Both approaches are clearly explained with effective use of examples. The application of these models for hedging and asset-liability management is also discussed.

Although misleading at times, measures of price sensitivity based on parallel yield shifts are easy to compute, commonly used and a foundation of more general measures. This chapter considers price sensitivity measures based on parallel yield shifts, explaining the calculations and the weaknesses of these measures. Technical definitions ... click here for more details.

This chapter provides an excellent introduction to mortgages, mortgage mathematics, mortgage features, historical mortgage behavior and mortgage models, including static cash flow models, implied models and prepayment models. This foundation then allows the explanation of mortgage-backed securities, including planned amortization class bonds, collateralized mortgage obligations and interest-only & principal-only strips.

Measures of price sensitivity are used in many ways to manage fixed income portfolios. This chapter provides a thorough explanation of one-factor measures of price sensitivity. DV01 and duration are two measures of interest rate sensitvity that are described. The process of estimating price changes with DV01 ... click here for more details.

This chapter shows how to price fixed income derivative securities using binomial trees and multinomial trees. The entire process of using trees is explained (with detailed examples), including the use of risk-neutral probabilities, the issues associated with smaller time steps and the problem of applying equity derivative methods, namely ... click here for more details.

Yield-to-maturity, or simply yield, can be a convenient summary measure of a bond`s market price, but its weaknesses and assumptions need to be understood. This chapter provides an excellent overview of yield, its relationship to spot rates and realized return, and the effect of cash flow structure. Effective ... click here for more details.