Fixed-Income Securities

Fixed-Income Securities_[Lionel_Martellini,_Philippe_Priaulet,_StéphaneFixed-Income securitiesWiley Finance SeriesCountry Risk Assessment Michael Bouchet, Ephraim Clark and Bertrand groslambertThe simple rules of risk: Revisiting the art of risk management Erik BankMeasuring Market risk Kevin DowdAn Introduction to Market risk Management Kevin DowdBehavioural finance james montieAsset Management: Equities Demystified Shanta AcharyaAn Introduction to Capital Markets: Products, Strategies, Participants Andrew M ChisholmHedge Funds: Myths and Limits Francois-Serge HabitantThe Manager's Concise guide to Risk Jihad s naderSecurities Operations: a guide to trade and position management Michael SimmonsModeling, Measuring and Hedging Operational risk Marcelo CruMonte Carlo methods in FirPeter JackelStructured Equity Derivatives: The Definitive Guide to Exotic Options and Structured Notes Harry KatAdvanced Modelling in Finance Using Excel and VBa Mary Jackson and Mike StauntonOperational Risk: Measurement and Modelling Jack KinAdvance Credit Risk Analysis: Financial Approaches and Mathematical Models to Assess, Price and Manage CreditRisk Didier Cossin and Hugues pirotteInterest Rate Modelling Jessica James and Nick WebberVolatility and Correlation in the Pricing of equity, FX and Interest-Rate Options Riccardo rebonatoRisk Management and Analysis vol. 1: Measuring and Modelling Financial Risk Carol Alexander(ed)Risk Management and Analysis vol. 2: New Markets and Products Carol Alexander (ed)Interest-Rate Option Models: Understanding, Analysing and Using Models for Exotic Interest-Rate Options(secondedition) Riccardo rebonatoFixed-Income securitiesValuation, Risk Management and Portfolio StrategiesLionel martelliniPhilippe PriauletandStephane priauletWILEYCopyrightc 2003John wiley sons Ltd, The Atrium, Southern gate, ChichesterWest Sussex Po19 8SQ, EnglandTelephone(+44)1243779777Email (for orders and customer service enquiries ) cS-books@wiley.co ukVisitourHomePageonwww.wileyeurope.comorwww.wiley.comAll Rights Reserved. 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If professional advice orother expert assistance is required, the services of a competent professional should be soughtOther Wiley Editorial officesJohn Wiley sons Inc, lll River Street, Hoboken, NJ 07030, USAJossey-Bass, 989 Market Street, San Francisco, Ca 94103-1741, USAWiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, GermanyJohn Wiley sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, AustraliaJohn Wiley sons(Asia)Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809John wiley sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W ILIWiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic booksThe views, thoughts and opinions expressed in this book are those of the authors in their individual capacities and shouldnot in any way be attributed to Philippe Priaulet as a representative, officer or employee of HSBC-CCEnot in any way be attributed to Stephane Priaulet as a representative, officer or employee of Ara. capacities and shouldThe views, thoughts and opinions expressed in this book are those of the authors in their individual capacities and shouldLibrary of Congress Cataloging-in-Publication DataMartellini. LionelFixed-income securities: valuation, risk management and portfolio strategies/lionelMartellini, Philippe Priaulet, and Stephane Priauletp cm.(Wiley finance series)Includes bibliographical references and indexIsBN 0-470-85277-I(pbk: alk. paper)1. Fixed-income securities -Mathematical models. 2. Portfoliomanagement -Mathematical models. 3. Bonds -Mathematical models, 4. hedging(Finance)-Mathematical models. I. Priaulet, Philippe. Il. Priaulet, Stephane. Ill. Title. IVSeriesHG4650.M3672003332.63′2044—dc21003041167British Library Cataloguing in Publication DataA catalogue record for this book is available from the British LibraryISBN0-470-85277-1Typeset in 10/12. 5pt Times by Laserwords Private Limited, Chennai, IndiaPrinted and bound in great britain by antony rowe Ltd, Chippenham wiltshireThis book is printed on acid-free paper responsibly manufactured from sustainable forestryin which at least two trees are planted for each one used for paper productionTo Adhara, Antonella, Calypso, Daphne, isabelle and manonTo our parents and familiesTo our friendsContentsabout the authorsXIXPrefaceXIAcknowledgmentsXXVNotationPART IINVESTMENT ENVIRONMENTBonds and Money-Market InstrumentsBonds3331.1.1General Characteristics of bonds11.2Bonds by issuers171.2 Money-Market Instruments2512.1Definition1.2.2The role of the Central bank22212.3T-Bills55612.4Certificates of Deposit2812.5Bankers' Acceptances12.6Commercial Papers22291.2.7Interbank Deposits12.8Repo and reverse repo market Instruments303 End of Chapter Summary321. 4 References and Further readin14.1Books and papers3314.2Websites and others33Problems341.5.1Problems on bonds341.5.2Problems on Money-Market Instruments361.6 Appendix: Sector Breakdown of the Euro, the UK and the JapanCorporate Bond Markets37Bond prices and yields2.1 Introduction to Bond Pricing412.2 Present value formula43