16-Financial-Engineering-Principles-Beaumont

276 INDEX

Coupon-bearing Treasury Credit absorbing vehicle, 101
(continued) Credit card receivables, 262
reinvestment patterns, Credit derivatives, 75, 97–108
requirements,
21fn, 22fn issuer-specific types, 101
profiles, 107t
one-year, 230 valuation, 99
Covenants, 250–253 Credit risks, 25, 75–89, 165, 190
allocation methodology,
types, 251t
CPI. See Consumer Price Index 216–217
CPR. See Constant Prepayment comparison, 225
decrease, 226
Rate double-A, 78
Credit, 73 protection. See Downside

call option, 257 credit risk protection
cone, 200, 201f quantification, 203
considerations, 158 security types, conceptual
conversion factors, 260
default swap, 104 linking, 94f
dynamics. See Intramouth Credit-enhanced bond, creation,

credit dynamics 147f, 148f
incremental risk, 223 Credit-enhancing strategies, 267f
instrument. See Spot Credit-free securities, 79
interrelationships, 216–217 Credit-linked note, 101, 105
near-term outlook, 103
quality, uncertainty, 22, 25 schematic, 101f
rating, 74t, 79 Credit-related appreciation, 149
Credit-related events, 99
insurance, 75 Credit-related risks, layering, 93f
restrictions, 263f Credit-sensitive bond, 100
review, 75 Credit-sensitive instrument. See
shocks, 79
spread, 79 Nonderivative credit-
sensitive instrument
increase, 100 Credit-sensitive products,
option, 100 demand, 103
trades, 166 Credit-sensitive securities, 103
watch, 75 Creditworthiness, evaluation, 76
yield spreads, 60f Crossover credits, 166

TLFeBOOK

Index 277

CTD. See Cheapest-to-deliver experiences, 74
Cumulative preferred convertible probability, 202–203
rates, 99t
stock, mapping scenario, 5. See also Country-
process, 267f
Cumulative protection, 82 level default scenario
Currencies. See National swap. See Credit
currency; Nonnational Deflation, 8
currency; Planet currency Delegated underwriting and
acceptance. See Local
currency; Sponsor currency servicing security
controls, 87 (DUS), 142
free flow, 85 Delivery. See Accept delivery;
futures, opportunities, 51 Make delivery
management, 158 definition, 118
price cone, 233f options, 46, 115–120,
rating. See Foreign currency
120fn
rating; Local currency value, 121f
summary, 64 process. See Chicago Board
swap, 249
Currency-enhanced of Trade
taking, 77
securities, 129 Delta. See Implied delta;

D Synthetic option
hedge, 126
Debt, 4. See also Bad debt; movement, 210–211
Distressed debt; Longer- price sensitivities, 198f
dated debt; Shorter- usage, 197, 210
dated debt Delta-adjusted amount. See

continuum, 268f Notional amount
cushion, 95 Delta-neutral strategy, 126
management, 85 Depreciation, 8
Decapitalization, 250 Derivatives, 7. See also Credit
Deep in-the-money, 144
Deep out-of-the-money, 144 derivatives
Default Dirty prices, 37, 115, 174. See
definition, 75
also U.S. Treasury note
calculation. See Forward
dirty price calculation

TLFeBOOK

278 INDEX

Discount Duration, 172–182. See also
currency, 49 Macaulay’s duration;
notes, 245 Modified duration; Portfolio
process, 27 calculation. See U.S. Treasury
rate, 26fn, 36 bill; U.S. Treasury STRIPS

Discrete callables, 131–133 relationship. See Carry
Distressed company, 5 Duration-neutral positions, 245
Distressed debt, 24 DUS. See Delegated underwriting
Distressed securities, 151
Distressed/default situations, and servicing security

248–249 E
Dividend-paying philosophy, 29
Dividends, 4 Economic cycles, 100
Economic hedge, 235
formula, expected growth, 30 Economic weakness, 103
payment, 47, 124 Efficiency. See Market
yield, 48 Embedded calls, 148, 257
DJIA. See Dow Jones Industrial Embedded optionality, 136
Embedded puts, 148
Index Embedded short options, 130
Dollar roll, 144 Emerging markets, 88, 151
Dollar-euro exchange rate, 49 Employee Retirement Income
Domestic bond markets,
Security Act (ERISA), 262
Treasuries segments, 79 underwriters, exemption
Double-A. See Credit risks
Double-B company, 201 eligibility, 263t
Double-B corporate bond, 224f Entities, triple-A ratings, 87
Dow Jones Industrial Index Equities, 227f

(DJIA), 162 bonds, similarities/differences,
Dow Jones Utility Index, 162 7t, 98t
Downside credit risk
buybacks, 250
protection, 149 cash flows, 30f
Downside protection, 146 diversification, 227
Downside support, 148 futures. See Cash-settled
Drift
equity futures
definition, 75, 98–99 index futures, 47
experiences, 74, 98 life cycle blend, 155
Due diligence, 5 market, preferred stock, 129

TLFeBOOK

Index 279

price cone, 232f Expected expenses, 220
price risk, 182–204 calculation, 221
returns, 232
statistical methods, 205 Expected losses, 220
summary, 64 calculation, 221
ERISA. See Employee Retirement
Expected return, 220
Income Security Act Extramarket forces, 256
Euribor rate, 80 Extramarket incentive, 57
Euro
F
creation, 204–205
market, 49 Face amount, 20
zone members, 254 Fallen angel, 201
Eurodollar-denominated Fannie Mae. See Federal National

securities, 205 Mortgage Association
Eurodollars, 80 FASITs, 262
Fat-tail distributions, 68
futures, 192, 205 Federal budgets, market control,
instruments, 192
rate, 49 238–239
spot, 192 Federal Financial Institutions
European Central Bank, 85
European Community, 105 Examination Council
European option, 145 (FFIEC), 261
Eurorates, 49–50 Federal Home Loan Bank
differential, 50 (FHLB), 243, 245–246
Euroyen yield, 80 Federal Home Loan Mortgage
Event-driven situations, 152 Corporation (FHLMC),
Events. See Credit-related events 129–130, 242
Exchange, 35. See also Chicago pass-thrus, 136fn
Federal National Mortgage
Mercantile Exchange rate, 8. Association (FNMA),
See also Dollar-euro 129–130, 239, 242
exchange rate; Forward pass-thrus, 136fn
exchange rates product, 246fn
transaction, 77 FFIEC. See Federal Financial
Exchange-traded contracts, 260 Institutions Examination
Exchange-traded option, 214 Council
Exercise right, 129 FHLB. See Federal Home Loan
Bank

TLFeBOOK

280 INDEX

FHLMC. See Federal Home Loan Forward duration value. See
Mortgage Corporation Securities

Financial engineering, 113 Forward exchange rates, 9
appendix, 161–170 Forward formulas, 53t
Forward leaps, 40
Financial fundamentals, 5 Forward points, 50t
Financial guarantee Forward price, 214

schematic, 104f strike price, contrast, 208
Financial products, investing Forward rates, 44t
Forward settlement, 33
profile, 158–159 Forward spread (FS), 61f,
Financial Times Stock Exchange
133, 134f
(FTSE), 162 calculation. See Non-Treasury
Financing
security
agreed-upon rate, 36 interrelationships, 61f
rate, 36, 194 Forward transaction, 124f. See
risk, 189
short-term rate, 39 also Offsetting forward
Fixed income transaction
arbitrage, 151 Forward yields, spot yields
marketplace, 163 (convergence), 191f
products, outperformance, 205 Forward-dated option, 199
securities, 101, 205 Forward-forward arrangement,
196
price change, effect, 181 Forward/future profile,
Fixed-coupon par bond, 104 206–207
Fixed-rate product, 137 Forwards
Flat price, 37fn cash flow ownership,
FNMA. See Federal National
relationship, 40f
Mortgage Association futures, contrast, 34
Foreign currency rating, 83–85 interrelationships, 56f
Forward agreement, 194 markets, 79
option, building-block
payoff profile, 208
Forward clean price approach, 56
summary, 51–63
calculation, 38 undervaluation, 57
Forward contracts, yield value, 44

holders, 229fn
Forward dirty price

calculation, 38

TLFeBOOK

Index 281

Freddie Mac. See Federal Home Going long, 34
Loan Mortgage Corporation Gold standard, 7
Goods
Frequency, 19. See also
Compounding frequency cost, subsidies, 11–12
supply/demand, 11
FS. See Forward spread trade bans, 12
FTSE. See Financial Times Stock Government National Mortgage

Exchange Association (GNMA),
Fund management themes, 154t 136, 138
Fund strategies, 169t pass-thrus, 136fn
Funding sources, 247 Group of Seven (G-7), 67, 88
Futures, 34–45. See also Bonds; Group of Ten (G-10), 186
Growth funds, 154
Equity index futures Growth-type index, 154
cheap trading, 120
contract. See Standard & H

Poor’s 500 Hedge. See Delta; Economic
physical settlement, 47 hedge
unwinding, 35
contrast. See Forwards funds, 150, 151, 221
opportunities. See Currencies Hedging. See Market neutral
summary, 51–63 Held for portfolio, 259
undervaluation, 57 Hicks method, usage, 178
usage, 125f Historical volatility, 66–68

G formula, annualizing term, 67
usage, 69
G-7. See Group of Seven Holding companies, 252
G-10. See Group of Ten Home mortgages, purchase, 130
Gamma, relation, 199f
Gap management, 157 I
GC. See General collateral
General collateral (GC), 196 Idiosyncratic risk, 219
Ginnie Mae. See Government IMF. See International Monetary

National Mortgage Fund
Association Implied delta, 211
Global reserve currencies, 205
GNMA. See Government definition, 212
National Mortgage Implied forward credit outlook,
Association
backed-out, 202

TLFeBOOK

282 INDEX

Implied repo rate, 123 parity, 8–9
Implied securities lending models, 232

rate, 123 policy, homogeneity, 254
Implied value, 7 swap, 101–102

value, calculation, 69 schematic, 103f
Implied volatility, 66–70, 232 Interest rate-sensitive series,
Income. See Ordinary income
Income fund, 155 linkage/quantification,
182–183
types, 151 Internal strategic planning, 82
Income-oriented funds, 155 International fund, 157
Incremental returns, 165 International Monetary Fund
Incremental yield, 132 (IMF) loans, 188
Indexed portfolio managers, International Swaps and
Derivatives Association
167fn (ISDA), 104
Indexes In-the-money. See Deep in-the-
money
adjustments, 163 call option, 63fn
return, 153 put option, 125
India, long-term sovereign value. See Options
Intramouth credit dynamics,
currency rating/short-term 166–167
local currency rating, 88 Intrinsic value, 84, 125
Individual Retirement Accounts Investment banks, 5, 249–250
(IRAs), 242 Investment-grade bonds, 232
Inflation, 8 Investment-grade corporate
Initial public offering (IPO), securities, 103
82–83, 152, 248 usage, 182
Institutional investor, 253 Investment-grade index, 166
Interest paydown, pass-thru Investor-related regulations,
principal (relationship), 138f 265t–266t
Interest rate. See Short-term Investors, 4
interest rates profile, 249
changes, 230 Investor-specific assets, 57
decline, 135fn Investor-specific cash flow, 57
differential, 8
futures, usage, 235
increase, 209

TLFeBOOK

Index 283

IPO. See Initial public offering London Interbank Offered Rate
ISDA. See International Swaps (Libor), 49, 80

and Derivatives Association cash investment, 104
Issuers, 73 maturity, 97fn
rates, 102, 104
profile, 19 Long option, 211
rating, 74 Long-dated security, 155
Longer-dated debt, 76
K Longer-term borrowing, 76
Long-term bonds, 76
Kurtosis, 68 Long-term capital gains, 242
Long-term Equity Anticipation
L
Securities (LEAPS), 190
LEAPS. See Long-term Equity Long-term investment, 259
Anticipation Securities Long-term loan, 157

Leaps. See Forward leaps M
Leverage strategies, 165–166
Libor. See London Interbank Macaulay’s duration, 174–175
Macaulay’s methodology, usage,
Offered Rate
Liquidity premium, 44. See also 178–179
Macro fund types, 151
Non-Treasury liquidity Macro-oriented business-level
premium
Loan exposure, protection, 235
profiles, securitization, 90 Make delivery, 46
transaction, 122 Mapping process, 144f. See also
Local currency, 6
acceptance, 186 Cumulative preferred
rating, 83–84 convertible stock
Local market orientations, Margin account, 35
252–253 Market. See Secondary markets
Locking in, 227 benchmarks, 203
Lockout, 141 capitalization values, 48
period, 131 choppiness, near-term
protection, 142
Log-normality, Black-Scholes period, 52
assumption, 126 control. See Federal budgets
discipline, 259

TLFeBOOK

284 INDEX

Market (continued) price differences. See
efficiency, 258 Present value
environment, 241
index, 153 values, increase, 176
movement, 214 Monetary authorities, 41
participants, role Money market
enhancement, 260
prices, attractiveness, 52 instruments, 245
regulation, 257 yield, 26fn
risk, 205 Moody’s Investors Service
reduction, 190 ratings, usage, 166
timing, 152 statistical data, 98–99
transactions, 77fn transition matrices, 100t
value, actual worth (material Mortgage-backed securities
difference), 57
volatility, zero value, 71 (MBSs), 103, 134, 139,
164–165. See also
Market neutral Collateralized MBS;
arbitrage, 151 Overcollateralized MBS
securities hedging, 152 callable bond optionality,

Market-moving event, 67 contrast, 136t
Marking convention, 167 cash flows, 136, 137f
Maturities, 3 classes, 140
life, 140
date, 19, 131–132, 144, 175 market, 165
presence, 268 pass-thru, 168
pool, 140
rating. See Split maturity principal, 233
rating purchases, 261
types, 262
restrictions, 168 usage, 182
yield, 26 valuation, 137
MBSs. See Mortgage-backed Mortgages
option-related dynamics, 134
securities pool, 129
Mexico, default (1982), 102 Moving average calculation, 68fn
Modeling conventions, 168 Moving-mean calculation, 68fn
Modified duration, 175

line, 177

TLFeBOOK

Index 285

Multiple, 31 Nondeveloped markets, 88
Multiplication, distributive Nonfixed income securities, 38
Nonnational currency, 88
property, 26fn Non-par bond Treasury
Multistrategy fund types, 152
Municipal bonds, 247 security, 44
Non-pass-thru-type structures,
N
139
NAIC. See National Association Nonsynthetic CDO, 106
of Insurance Commissioners Nonsystematic risk, 219

NASDAQ, 162 contrast. See Systematic risk
National Association of Non-Treasury bond, 24, 60
Non-Treasury instruments, 239
Insurance Commissioners Non-Treasury liquidity
(NAIC), 261
National currency, 188. See also premium, 45
Nonnational currency Non-Treasury par bond curve, 60
Negative carry, 117–120, 124 Non-Treasury products, 102
Net basis, 218 Non-Treasury security, 59, 102
New York Stock Exchange, 162
Next day, definition, 16 forward spread calculation, 45
Nikkei, 162 Not-for-profit entities, 241
Nominal spread (NS), 61f, Notional amount, 126
133, 134f
interrelationships, 61f delta-adjusted amount, 127
Nominal yield Notional contract value, 192
differences, 243 Notional principal, 260
spread, calculation, 43 NS. See Nominal spread
Nonbenchmark security, 28
Noncallable bond, 208 O
price, 199
Noncallable securities, 199 OAS. See Option-adjusted spread
Non-cash-flow paying security, OECD. See Organization for
206, 229
Nonderivative credit-sensitive Economic Cooperation and
instrument, 100 Development
Off-exchange transaction, 77
Offsetting forward transaction,
212
Off-the-run issue, 196

TLFeBOOK

286 INDEX

Off-the-run securities, 44fn Out-of-the-money, 125. See also
OLS. See Ordinary least squares Deep out-of-the-money
On special (special), 196, 240
On-the-run issue, 44fn, 196 call option, 63fn
On-the-run securities, 44fn movement, 210
On-the-run Treasury, 44fn put option, 63fn
Opportunistic fund types, 152 Overcollateralization, 90
Opportunity cost, 194 Overcollateralized MBS, 135
Option-adjusted spread (OAS), Overlay funds, 158
Over-the-counter (OTC)
58–61, 133, 134f forward-dated transactions, 78
impact, 61f market, 248, 253
interrelationships, 61f options, 168
pricing model, 200 products, 168, 260
volatility, relationship, 200 transaction, 77
Option-pricing model, Treasury options, 79

modification, 69 P
Options
PACs. See Planned amortization
building-block approach, 56 classes
deferred feature, 58
interrelationships, 56f Par bond
in-the-money value, 208 curve, 26, 43
model, tree. See Binomial yield, 26

option model Par swap, 104
strategies, 168 Pass-through security, 134, 226
undervaluation/over- Payments, timeliness, 22
Payoff profile, 127, 193, 206,
valuation, 57
usage, 125f 207f. See also Call payoff
Option-type product, 214 profile; Callable bonds;
Ordinary income, 242 Forward agreement; Put
Ordinary least squares (OLS) payoff profile; Sigma;
Variance; Volatility
regression, 183fn benefit, 208
Organization for Economic Peer group, 5
Perpetual bond, 97
Cooperation and Perpetuals, coupons, 97fn
Development (OECD),
259–260

TLFeBOOK

Index 287

Planet currency, 188 sensitivity. See Delta; Theta;
Planned amortization classes Vega

(PACs), 140–142. See also test, 262
Busted PAC uncertainty, 18, 25
application, 142f values, contrast, 177t, 181t
Portfolio volatility, 226. See At-the-
construction. See Bonds
duration, 185 money
emphasis, 152 yield, relationship, 200
managers, 96, 162–164, 167fn. Price to book value, 231
Price-depressing effect, 81
See also Indexed portfolio Price-earnings (P/E) ratio,
managers; Total returns
forecast, 234 150, 231
product mix, 165 Price-lifting effect, 81
Positive carry, 118, 124 Price/yield relationship, 179–180
PPP. See Purchasing power parity
Predetermined life span, 3 comparison, 178f, 179f, 181f
Preferred stock, 144. See also Principal, 4
Equities
type, 145 balances, 234f
Premium currency, 49 Principal payments, 135–137
Prepayments, 129, 135 Principal-coupon cash flows, 137
rate. See Constant prepayment Priorities, 5–8
rate
speed, 142 ranking, 4
Present value, modified duration Probability
(price differences), 177
Present yield, 25 profiles, 236f
Price reduction, 235
cone. See Coupon-bearing uncertainty, label, 222
Treasury; Currencies; value, 139
Equities Probability-weighted principal,
risk, 223, 236. See also
Equities 140
currency classification, 187f Probability-weighted value, 140
Productivity, 8
Products, 3. See also Option-type

product
characteristics, 255t
construction, 76
interrelationships, 204–206

TLFeBOOK

288 INDEX

Products, 3 (continued) Reference curve, 45
mix. See Portfolio Regression analysis, 219
rankings, continuum, 6f Reinvested proceeds, 165
restrictions, 263f Reinvestment

Profit opportunities, 118 rates, 20–21, 41, 223fn, 229fn
Profitability, 29 uncertainty, 18
Promises, 3–8 Reinvestment risk, 195, 223, 236
Prospectus, usage, 250–253 comparison, 225
Public Securities Association dispensing, 227
uncertainty, 225
(PSA) model, 138 Relative return
Purchasing power parity (PPP), fund, 150
investing, 153–159
9–13
models, 232 strategies, 161–164
Put option, 147. See also In-the- Relative value, 27, 79
REMICs, 262
money Repurchase (repo). See Reverse
value, 53, 146
Put payoff profile, 208 repo
Putable bonds, 148–149 agreement, 123, 195
financing. See Synthetic option
Q market, 36, 79
rate. See Implied repo rate
Quality option, 121fn Residual tranche, 141
Retirement accounts (401k
R
plans), 242
Raised debt, 86 Return on risk-adjusted capital
RAROC. See Risk-adjusted
(RORAC), 219–220
return on capital Return profile, 194f
RARORAC. See Risk-adjusted Reverse repo, 123, 124f
Rho risk, 127
return on risk-adjusted Risk. See Benchmark; Credit
capital
Rating. See Issuers; Split maturity risks; Price; Reinvestment
rating risk
agencies, 74, 82, 97 adjustment, 218–219
insurance. See Credit calculations, 221
Recoveries, 94t capital, allocation, 216f
rates. See Weighted average

discounted recovery rates

TLFeBOOK

Index 289

conceptualization, 108f S
limits, 217
macro context, 234–235 Sale price, 17
management, 161, 171, Same-day settlement, 33
Savings and loan crisis (1990s),
222–225
appendix, 238–240 256
procedures, 260 Scenario analysis, 233–234, 237
measurement, 185 Secondary markets, 212
profile, 214 Securities
conceptual mapping, 225f,
face value, 211
237f forward duration value, 191
tolerance, 221 hedging. See Market neutral
variable, 197 lending, 122–123
Risk-adjusted return on capital
market, 36
(RAROC), 218–220 prices, 231
Risk-adjusted return on risk- purchase, 248
risk, 79
adjusted capital risk/return profile, 159
(RARORAC), 219 Securities and Exchange
Risk-adjusted variables,
219–220 Commission (SEC), 242
Risk-based capital guidelines, Securitization. See Loan profiles
259 Security-specific risk, 219
Risk-free asset, 211 Selling short, 16
Risk-free investment, 195 Senior structures, 201–202
Risk-free product, 122 Separately Traded Registered
Risk-free rate, 194–197
Risk-oriented bondholders, 252 Interest and Principal
Risk/return profiles, 172, 205 Securities (STRIPS), 164–165
Risk-reward trade-offs, 226, 235 30–year. See U.S. Treasury
Road shows, 83
Roll down, phenomenon, STRIPS
239–240 Servicer. See Asset-backed
Roll risk, 239
Roll-down risk, 239 securities
RORAC. See Return on risk- Settlement
adjusted capital
agreement, 34
dates, 15, 33, 175
Shareholders, 4
Short call option, 70
price, 199

TLFeBOOK

290 INDEX

Short selling, 125 Spread. See Nominal spread;
fund types, 152 Swaps

Short-dated liabilities, 157 calculation. See Nominal yield
Shorter-dated debt, 76 difference, 44
Shorter-maturity bonds, 78 value, 29
Short-term bonds, 76 SPVs. See Special-purpose
Short-term borrowings, 76
Short-term horizons, 192 vehicles
Short-term interest rates, 41 Standard & Poor’s
Short-term investment, 259
Sigma, 161 100 (S&P100), 162
ratings, usage, 166
payoff profiles, 126f statistical data, 98
Singapore, credit allocation, 218 survey/report, 94–95
Single-B company, 200–201 Standard & Poor’s 500
Single-C company, 201
Size restrictions, 168 (S&P500), 153
Small caps, 162 change, 182
Special. See On special equity index, 150
Special-purpose vehicles (SPVs), futures contract, 48, 126
price history, 185
93, 106, 256 rally, 206
Speed. See Prepayments returns, 161
Split maturity rating, 76 usage, 183–184
Sponsor currency, acceptance, Standard deviation
usage, 185
186 zero value, 70–72
Spot Standard error, 219
State-supported bailouts, 256
cash flow, 227–229 Strike price, 53, 71, 197, 202.
credit instrument, 202
interrelationships, 56f See also At-the-money
option, building-block contrast. See Forward price
objective, 211
approach, 56 STRIPS. See Separately Traded
position, 215
price, 15 Registered Interest and
transactions, 77fn Principal Securities
yields, 25 Subsidiaries, triple-A rating, 93
Swaps. See Constant Maturity
convergence. See Forward Treasury; Currencies;
yields Interest rate; Variance

TLFeBOOK

Index 291

dealers, 80–81 Term structure, 22
markets, 80–81 Theta
spread, 80
yields, 238–239 price sensitivities, 198f
Synthetic balance sheet structure, usage, 197
Third-party insurance,
schematic, 106f
Synthetic call option, 212 obtaining, 91
Synthetic CDO, 105 Timing option, 118
Synthetic CLOs, 254 Total return-oriented portfolio
Synthetic long forward, creation,
manager, 156
149f Total returns
Synthetic option
analysis, 176
creation, 209–211, 214 basis points, 163
delta, 211–213 calculation, 173t. See also
profile, 213f
repo financing, 211 Tax-adjusted total returns
Systematic risk, 219. See also components, comparison, 233t
funds portfolio managers, 153
Nonsystematic risk; investing, 153
Unsystematic risk relationship, 121f
nonsystematic risk, Trade date, 33, 76–77, 115fn
pay-in-full, 58
contrast, 219t Trading
records, 214
T rich/cheap, 28
Treasury versus Eurodollar
T plus 3, 16
Tariffs, 12 (TED) spread, 205–206
Tax law, industry-specific Triple-B entity, 249
True worth, 16
categories, 246 Trust preferred securities (TruPs),
Tax-adjusted total returns,
262
calculations, 243 TVA. See Tennessee Valley
Tax-free funds, 155–156
Taylor series expansion, usage, Authority
Two-noncall-one, 131
173
TED. See Treasury versus U

Eurodollar Uncertainty
Tennessee Valley Authority conceptual mapping, 222f

(TVA), 242, 243

TLFeBOOK

292 INDEX

Uncertainty (continued) U.S. Treasury note
degree, 226 cash flow profile, 31fn
increase, 235 dirty price, 175
label. See Probability
layers. See Bonds U.S. Treasury obligations, 84
U.S. Treasury rates, 102
Uncollateralized loan, 90 U.S. Treasury STRIPS, 175–176
Unsystematic risk, 219
Unwinding. See Futures 30–year, 172
U.S. bond index, 182 duration, calculation, 173–174
U.S. Department of Labor yield, 178
U.S. Treasury zero-coupon
(DOL), 262
U.S. dollar-denominated bonds, 149

issues, 248 V
U.S. federal agency bonds,
Value
taxable status, 243t funds, 153
U.S. Treasury bill investing, 157
uncertainty, 202
3–month, 51
cash flows, 17fn Value at Risk (VaR), 261
Variance
6–month, 42, 223f
purchase, 236 payoff profiles, 126f
swap, 128
12–month-maturity, 229 Vega
duration, calculation, 173 price sensitivities, 198f
finding, 195 usage, 197
futures, 193 Volatility, 53, 66. See also At-the-
investment, 41
spot yield, 191 money; Historical volatility;
total return, 224 Implied volatility
yield, 26 calculations, 54fn
U.S. Treasury bonds, 84 increase, 200, 215
coupon cash flows, 23fn outlook, 215
predisposition, 31 payoff profiles, 126f
rallying markets, 102 price value calculation, 54
two-year, 42, 191 reference, 128
yield curve, 27 relationship. See Option-
U.S. Treasury coupon-bearing
adjusted spread
securities, 225 rolling series, 68fn

TLFeBOOK

Index 293

spread. See Zero volatility dynamic, 163
spread inversion, 234
differences. See Nominal yield
strategy enhancement, 156–157
creation, 125f increase, 103
execution, 192 references, 25
relationship, 143f. See also
swap, 127–128
value, 125, 229 Price
zero return, 193 spread, 24, 40, 79, 246fn. See
zero value, 55, 188
also Credit
W calculation. See Nominal

Weighted average discounted yield
recovery rates, 95t value. See Forwards
Yield of benchmark (YB), 28
Weightings, linkage, 186 Yield of nonbenchmark (YNB),
What-if scenarios, 244
Wilshire, 162 28
Worst-case scenarios, 257 Yield-to-maturity, 25, 37
Worth. See True worth YNB. See Yield of nonbenchmark

Y Z

YB. See Yield of benchmark Z tranches, 141
Yield. See Incremental yield; Spot Zero coupon security, price

cash flow-weighted average, dynamics, 230
19fn Zero volatility (ZV) spread, 59
Zero-coupon bonds. See U.S.
curve, 26. See also U.S.
Treasury bonds Treasury zero-coupon bonds

TLFeBOOK