We are leaving the world of options for a bit and entering the world of fixed income. This is the world of bonds, interest rates, and cashflows. Chapter 13 of Wilmott’s book is a self-contained introduction that does not require anything from earlier chapters. If you have ever wondered what a yield curve is or why bond traders care about something called “duration,” this is the post for you.
Previous: Introduction to the Series
Before we get into the weeds of bond investing, we need to agree on some basics. What even is a bond? How big is this market? And what does “systematic” mean when people throw that word around?
Book: Financial Markets and Institutions, 11th Edition Author: Jeff Madura Publisher: Cengage Learning, 2015 ISBN: 978-1-133-94788-2
Chapter 8 is where Madura gets into the math behind bond prices. If Chapter 7 was about the types of bonds, this chapter explains how to figure out what they are worth, why their prices change, and how investors manage the risk. It is the most technical chapter so far, but the concepts are fundamental to understanding how fixed-income investing works.
This is Part 1 of our retelling of Chapter 3 from “Trading the Fixed Income, Inflation and Credit Markets: A Relative Value Guide” by Neil C. Schofield and Troy Bowler (Wiley, 2011, ISBN: 978-0-470-74229-7).
Book: Systematic Fixed Income: An Investor’s Guide Author: Scott A. Richardson, Ph.D. Publisher: John Wiley & Sons, 2022 ISBN: 9781119900139