Bond Markets, Analysis, and Strategies
The standard course text on bond pricing and portfolio strategy.
Summary
Fabozzi's textbook is the standard undergraduate and professional introduction to fixed income, now in its tenth edition and used in university courses and CFA preparation.
The coverage runs from instrument description to analytics to portfolio strategy. Early chapters describe the sectors: Treasury and agency securities, corporate bonds, municipal bonds, mortgage-backed securities including pass-throughs and collateralised mortgage obligations, asset-backed securities and international bonds, with attention to the specific cash flow structures and legal features of each. The analytical chapters cover pricing, yield measures and their defects, spot rates and forward rates, term structure theories, duration and convexity, and the valuation of bonds with embedded options using binomial interest rate trees and option-adjusted spread. Later chapters cover credit analysis, interest rate risk measurement, active and passive portfolio strategies, immunisation and dedication for liability matching, and the derivative instruments used to manage interest rate exposure.
The treatment of mortgage securities is a strength, since prepayment behaviour and the resulting negative convexity are hard to explain and Fabozzi does it carefully.
The book is a textbook, so it describes and explains rather than arguing. It teaches the standard framework and does not seriously question it: the treatment of credit rating agencies, of structured product risk and of the assumptions behind prepayment modelling reflects industry practice rather than criticising it, which readers coming to it after 2008 should note. Editions vary considerably, and the mortgage and structured product chapters were revised substantially after the crisis.
Key takeaways 7
- Yield to maturity assumes coupons are reinvested at the yield itself, which makes it an unreliable measure of realised return.
- Duration measures price sensitivity to a parallel shift in rates, and convexity corrects the error in that linear approximation.
- Bonds with embedded options require valuation against an interest rate tree, because the option's value depends on the rate path.
- Option-adjusted spread separates the compensation for credit and liquidity from the value of the embedded option.
- Mortgage pass-through securities exhibit negative convexity because prepayments accelerate when rates fall.
- Immunisation matches the duration of assets to that of liabilities, which protects a portfolio's ability to meet obligations against rate moves.
- Spot rates rather than yields are the correct discount rates for valuing a bond's individual cash flows.
Who should read it
Anyone entering fixed income who needs the standard analytical framework and instrument descriptions in one reference.
About Frank J. Fabozzi
Finance professor and longtime editor of the Journal of Portfolio Management, who writes and edits the standard fixed-income handbooks.
The handbooks define how bond, mortgage and preferred-stock markets are measured: cash-flow mechanics, duration and convexity, credit structures, and the pricing conventions desks actually use. Practitioners and CFA candidates work through these volumes to value and hedge the instruments the equity literature skips.
Similar books 6
Chosen by shared topics, the entries that hold them, and the people who recommended both.
The standard reference on every kind of bond, its analysis and its management.
The CFA Institute's fixed-income text: bond valuation, risk and analysis.
Retail-investor guide with the clearest chapters on buying munis.
Lease structures, residual values and tax treatment of equipment leasing.
A reference on municipal bonds: credit analysis, structures and analytics.
Where it sits in the reference 2
Topics