Fixed Income Markets and Their Derivatives (Academic Press Advanced Finance)
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The 3e of this well-respected textbook continues the tradition of providing clear and concise explanations for fixed income securities, pricing, and markets. The book matches well with fixed income securities courses. The book's organization emphasizes institutions in the first part, analytics in the second, selected segments of fixed income markets in the third, and fixed income derivatives in the fourth. This enables instructors to customize the material to suit their course structure and the mathematical ability of their students.
* New material on Credit Default Swaps, Collateralized Debt Obligations, and an intergrated discussion of the Credit Crisis have been added.
*Online Resources for instructors on password protected website provides worked out examples for each chapter.
* A detailed description of all key financial terms is provided in a glossary at the back of the book.
Fixed Income Markets and Their Derivatives (Academic Press Advanced Finance) Review
Suresh Sundaresan's "Fixed Income Markets and Their Derivatives, 3rd" (FIM&D3) continues to provide a welcome introductory teaching text on the vast topic of "fixed income" (FI). My review is limited to four stars, however, because of some obvious additions that would have made the work more useful. This edition has improved grammar and editing and clarity and organization over previous editions.
Sundaresan' FIM&D3 is appropriate for teaching an undergraduate course in fixed income (both for business and finance majors) and for graduate students in generalist MBA programs (but NOT finance MBA).
It is necessary to compare competing texts to discover their merits and flaws, and given the vastness of the topic "fixed income" or "credit" no one text could hope to cover it all. The quickest comparison is to (never cited) Martellini and the Priaulet brothers' "Fixed Income Securities: Valuation, Risk Management, and Portfolio Strategies" (M&P's FIS). [Full disclosure: I am a colleague of both Priaulets and a student of Martellini]. Priaulet and Martellini take a direct, technical, and mathematical approach, in keeping with their own backgrounds in theoretical mathematics of FI. Sundaresan's FIM&D3 takes a more narrative approach, gently introducing analysis and functions. The texts aim at different audiences, and for those beginning on FI and then continuing on to a more advanced technical stream then M&P's FIS is the obvious choice; while those continuing on to a module on "marketing" would probably want to stick with Sundaresan's FIM&D3.
Which leads to another curious omission in citation in this otherwise fine book: Frank J. Fabozzi is never mentioned nor is a single text of his ever cited. Academic jealousy being what it is (Sundaresan is at Columbia and Fabozzi at Yale) and competitive publishing being tooth and nail probably explain it. Still, as the author or editor of over fifty titles on fixed income Fabozzi's absence is glaring, especially in light of the fact Duffie and Singleton are cited throughout. The gymnastic gyrations necessary to avoid citing Fabozzi boggle the mind.
Fobozzi's texts often suffer from being two different kinds of monsters: a "Frankenbook" or a Hydra. For Fabozzi's Frankenbooks, he WordPastes previously published chapters of other books, adds a single specialized chapter on the title's topic, and slaps a new cover on it and shops it well. Customers are often disappointed that they previously owned 90% of a "new" book from Fabozzi simply because they already own a few other of his titles. "Hydra" books are multi-headed monsters, trying to straddle the two horses of the demands of market practitioners, with those of teaching academics (who in turn need undergraduate, graduate generalist (MBA) and graduate specialist (MSFE, PhD) texts. Fabozzi's titles reach for all markets and often end up pleasing no one.
And so Sundaresan's FIM&D3 plays specifically to a more limited audience and is a success in contrast.
The overview chapter is thorough introduction to the major topics of inquiry in FI, covering general contracts, the over-the-counter nature of much of the market, players and their objectives, and the high points of risk (with counterparty risk strangely glossed over in "contractual risk'). An introductory technical chapter on price-yield conventions follows. A flaw is the U.S.-specific nature of the examples, amplified by closely examining the role of the Federal Reserve in Chapter 3. Market structure is examined in chapter four, touching adequately on primary and secondary markets, but rather thinly on interdealer brokers ("the street"). A vanilla chapter on repo and repo agreements and treasury auctions fills out the first part.
Part two covers analytics in more depth, beginning with explications on DVO1 (the price of a basis point) duration and her many forms, and touches rather simply on convexity. It is here that sample spreadsheets and VBA code on programming a more robust duration calculation than that offered by MS Excel would have been welcome (Simon Benninga's always excellent "Financial Modeling in Excel" is the best text on the subject.). Yield curve dynamics and models are covered, but frankly here is where it is glaringly obvious that CD-ROM or dedicated website spreadsheet examples are needed. Chapter 10 on modeling credit risk is an excellent one-chapter introduction to a vast topic in and of itself (libraries of books are available on this topic alone).
Part three cautiously titles itself "Some Fixed Income Market Segments" and is apt. Sundaresan covers agency debt, mortgage-backed securities, and inflation-linked notes. The brevity of this list of FI instruments only amplifies how long the list of what he does not cover is.
Part four introduces FI derivatives, beginning with overnight rates, Eurodollar markets, treasury futures, and credit default swaps, and glossing over structured products in a chapter on collateralized debt obligations.
The text ends with a fine glossary of terms, and an index that appears adequate but not complete on all nouns and subjects (authors in the "suggested further reading" were sometimes not indexed, for example).
I am an academic and a practitioner, so I like to see a bibliography: strangely absent from this work, with only a handful of "suggested references and further readings" at each chapter's end.
For professors (such as myself) there is a very welcome dedicated website from the publisher with additional materials for lectures and assignments (registration required).
In summary, this is a text I would consider adopting if I were teaching an undergraduate or generalist graduate course in fixed income. FIM&D3 is a adequate, readable, well-organized, clear, logical, overview text of a vast field that quickly breaks down into difficult, technical, and arcane specializations. The mathematics used is not beyond those who have completed college level algebra (very little calculus is assumed). There are a plethora of additional topics I would have preferred were covered (portfolio approaches for market-makers, as well as investors, correlation, transition matrices, etc.) but perhaps those are best left to specialist or advanced texts.
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