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Bonds and Bond Derivatives, 2nd Edition


This book provides an introduction to bond markets and bond derivatives for students as well as for executives in commercial businesses and financial institutions. While many topics about debt instruments involve mathematics, this text presents the essential elements in an intuitive manner. Containing material that is accessible and engaging to students and practitioners alike, the book is ideally suited for debt markets courses, and provides a good fit with any finance curriculum. For practitioners, the book can be readily used as a training manual and reference source for firms involved in debt markets.

This new edition includes updated institutional material; new sections on callable bonds and the yield to call, convertible bonds, and methods for estimating and modern models of term structure of interest rates; as well as a comprehensive discussion of bonds in the European Economic Union. Additional end-of-chapter questions, PowerPoint slides, and an Instructor's test bank make this text and invaluable resource to students, scholars, and practitioners.

The author maintain supplementals material for this text on his website:

Miles Livingston is Professor of Finance at the University of Florida. He holds an MBA and PhD in Finance from New York University, and has taught at the University of Wisconsin, York University, Concordia University and the College of William and Mary. Livingston is the author of Money and Capital Markets, also published by Blackwell.




The Growth of Debt.

The Variability Interest Rates.

Plan of the Book.

1. Determinants of the Level of Interest Rates.

Federal Reserve.

Foreign Central Banks.

Normal Funds Approach.

Inflation and Interest Rates.


Questions and Problems.

2. Issuers.

The U.S. Treasury.

Indexing Bonds.

Government Sponsored Entities.

Municipal Bonds.




Questions and Problems.

3. Financial Intermediaries.

Initial Sale of Securities (Primary Market).

Dealers and Brokers (Secondary Market).

Mutual Funds.

Insurance Companies.

Commercial Banks and Thrifts.

Comparing Types of Debt Financing.


Questions and Problems.

4. Time Values.

A Timeline.

Future Value.

Present Value.

Price of a Bond.

Bond You to Maturity.

Other Yield Measures.

Perpetual Bonds.

Holding Period Returns.

Semi-Annual Interest.

Accrued Interest.

Newspaper and Internet Quotes.


5. Money Market Instruments in Rates.

Money Market Instruments.

Money Market Rates.


Questions and Problems.

6. The Risk of Changing Interest Rates.


Immunization at a Horizon Date.

Immunizing Assets and Liabilities.


Questions and Problems.


7. Time Value with Nonflat Term Structure.

Spot Interest Rates.

Present Value or Spot Prices.

Treasury Strips.

Forward Interest Rates.

Shape of the Term Structure.


Prices of Coupon-Bearing Bonds.

Yield to Maturity and Spot Rates.

Methods for Estimating the Term Structure Interest Rates.


Questions and Problems.


8. Arbitrage.


Conditions for Arbitrage.

Arbitrage and Present Values.

Arbitrage and Bond Coupons.

An Example of a Replicating Portfolio.

Creating Forward Contracts from Spot Securities.

Arbitrage and Forward Interest Rates.

Arbitrage Proof of Linear Relationship between Bond Price and Coupon.

Finding Arbitrage Opportunities.


Questions and Problems.

9. Term Structure Interest Rates.

Historical Patterns Annual Curves.

Segmented Markets Theory.

Increasing Liquidity Premiums.

Preferred Habitat.

Money Substitute.

Expectations Hypothesis.

Combined Theory.

Humpbacked Curves.

Holding Period Returns.

Modern Term Structure Models.


Questions and Problems.

10. Default Risk.

Default on Municipal Bonds.

Default on Mortgages.

Corporate Bonds.

Bond Ratings.

High-Yield (Junk) Bonds.


Questions and Problems.

11. Put and Call Options.

Call Options.

Put Options.

Put-Call Parity.

Determinants of the Value of a Call Option.

Employee Stock Options.


Questions and Problems.

12. Call Features on Bonds.

Reasons for Calling a Bond.

Embedded Options.

Yield to Call.


The Timing of Refunding.

The Existence of Call Provisions.

Callable Debt Versus Short-term Debt.

Advance Refundings.

Refunding Discounted Debt.

Sinking Funds.

Refunding Municipal Bonds.


Questions and Problems.

13. Mortgages.

Mortgage Mathematics.

Variable-Rate Mortgages.

Assumable Mortgages.

The Prepayment Option.

Marketable Mortgages.

Default and Mortgage Guarantees.

Derivative Mortgage Products.


Questions and Problems.

14. Futures Contracts.

Open Interest.

Margin and Marketing-to-Market.

Forward Vs. Futures Contracts.

Determinants of Futures Prices.

Speculative Futures Positions.

Hedging with Futures Contracts.


Questions and Problems.

15. Bond Futures.

Treasury Bond Futures.

Hedging with Financial Futures.

Cheapest Deliverable Bond.

Other Aspects of the Delivery Process.


Questions and Problems.

16. Other Derivatives.

Floating-rate Notes.

Interest Rate Swaps.

Convertible Bonds.

Preferred Stock.


Questions and Problems.

17. Exchange Rates and International Investments.

International Investment.

Exchange Rates.

Exchange Rates and Imports and Exports.

Exchange Rates and Investment Returns.

Inflation, Interest Rates, and Exchange Rates.

Spot and Forward Exchange Rates.

Covered Interest Arbitrage.

Time Series Properties of Exchange Rates.

International Bond Markets and.


Questions and Problems.

Se;ected References.