Publisher: McGraw Hill

Authors:  Mark Wise, Vineer Bhansali

ISBN: 978-0071621205

Click Here To Purchase Fixed Income Finance: A Quantitative Approach (McGraw-Hill Finance & Investing)

Fixed Income portfolio management has attracted lot of interest from professionals with a hard science and math background due to the application of various quantitative techniques in the valuation of fixed income securities and the construction of fixed income portfolios.

However, there have been very few good books that give an in-depth introduction which caters to aspiring fixed income analysts with a strong quantitative background. Fixed Income Finance - A Quantitative Approach aims to provide a rigorous but still clear introduction to this field.

As with any introductory fixed income book, bond basics are first covered starting from the basics of compounding and discounting. The chapter quickly progresses to other key risk concepts including duration, convexity and advanced concepts including corporate bonds and credit risk with the mathematical representation of defaults and risk premium. 

The book explains the fundamental relationship of bonds with stocks and gives rigorous descriptions of fixed income instruments including derivatives, mortgage, mezzanine bonds, CDOs and tranches.

Basic mathematical concepts behind financial modeling are described next starting with the probability distribution of corporate bond returns and the concepts behind correlated random variables. These provide a strong foundation for the modeling of fixed income securities and portfolio covered later on.

Concepts and techniques that are the key of quantitative modeling of bonds and portfolios such as random walks, survival probabilities, log-normal variables, mean reverting random walks and correlated random walks are covered thoroughly.

The pricing of European stock options is taken up in the chapter on structural models which describes clearly the risk neutral pricing of options. The text makes the relationship between debt and equity in a very clear and intuitive manner.

In the section on Bond Portfolio Management, the basic of portfolio construction such as investor preferences and utility functions are explained with the need for going beyond the basic mean-variance portfolio allocation. There is a in-depth coverage of fixed income portfolio issues including risk factors, hedging and portfolio allocation with several risky assets.

While explaining Term Structure Models the book helps in building a strong grasp of the linkages between macro variables and the model itself. Thus the explanation of the one- and two- factor Vasicek models is very intuitive. Apart from basic concept such as Taylor rule the section also gives a good introduction to modeling explicit time dependence.

In giving details about instruments, the authors have focused on a few key instruments to highlight the modeling techniques. Rather than a long list of instruments, the book looks at simple building blocks including forwards, futures, interest rate swaps and caps.

To complement the sections on modeling techniques and instruments, there is a strong section on implementation. Implementation of interest rate models using binomial trees and an appendix discussing the Heath Jarrow Morton model on a recursive tree gives a good case study for implementation.

Fixed Income Finance - A Quantitative Approach is well recommended as it succeeds in explaining rigorously the fundamentals of fixed income modeling in a clear, direct and transparent way. The book is compact and explains the key instruments to highlight the concepts, while retaining a strong focus on modeling techniques.