The goal of this book is to convey the institutional, conceptual, and quantitative frameworks used by sophisticated fixed income market practitioners. The overview chapter is a broad survey of markets, market participants, and some intermediate‐term trends (monetary policy in a regime of abundant reserves; negative rates in Europe and Japan; and the changing nature of liquidity). Chapters 1 through 6 present the basic language and toolbox of the fixed income cosmos: arbitrage pricing; rates and spreads; DV01, duration, and convexity; and multi‐factor and empirical hedging. Chapters 7 through 9 explain how term structure models are used for better understanding the shape of the term structure of interest rates; for pricing fixed income derivatives; and for relative value and even macro‐style trading. Chapters 10 through 16 then delve into the details of several large and important markets: repurchase agreements or repo; note and bond futures; short‐term rates and their derivatives; interest rate swaps; corporate bonds and credit default swaps; mortgages and mortgage‐backed securities; and fixed income options.

While fixed income is an inherently quantitative subject, this book takes a very applied approach. All ideas are presented through examples, using market prices, events, or meaningful applications whenever possible. (A list of particularly extensive applications is given on the next page.) There is a lot of emphasis on orders of magnitude (e.g., “About how big is the interest rate swap market?” or “Approximately what is the DV01 or duration of a 10‐year par Treasury?) and on fundamental concepts (e.g., “What does it mean for a position to be negatively convex?” or “What sorts of trades and positions have financing risk?).

This fourth edition is a comprehensive revision. All data on markets and market participants have been updated; all examples and applications updated; and all of the in‐depth market presentations rewritten to reflect contemporary issues (e.g., variation margin of cleared interest rate swaps changed to “settled‐to‐market”). The timing of the edition is deliberate with respect to the transition away from LIBOR. While SOFR and other replacements are relatively young, it is time for a textbook treatment of these new reference rates and their associated derivatives.

We would like to thank Bill Falloon, who has enthusiastically supported this textbook for two decades, and Purvi Patel, for her patient and expert shepherding of this edition through the production process; Judy DiClemente, for her deeply thoughtful editing of the manuscript; Sienna Sihan Zhu for excellent and careful research assistance; Kristi Bennett for diligent copy editing; and the people who kindly and generously gave of their expertise and time to enrich the contents of this book: Viral Acharya, Amitabh Arora, Richard Cantor, Jonathan Cooper, Richard Haynes, David Lohuis, Lihong McPhail, Greg Perez, David Sayles, James Streit, and Regis Van Steenkiste.

EXTENDED EXAMPLES, APPLICATIONS, AND CASES

• Idiosyncratic Pricing of US Treasury STRIPS (Section 1.5)
• Relative Value Spreads of High‐Coupon Treasuries (Section 3.6)
• P&L Attribution for an Outright Long in a High‐Coupon Treasury (Section 3.8)
• Hedging a Century Bond (Sections 4.3 and 4.6)
• Hedging Stylized Pension Liabilities (Sections 4.8 and 5.4)
• Regression Hedge of the Johnson & Johnson 2.45s of 09/01/2060 with a 30‐Year US Treasury (Section 6.1)
• Estimation of the Gauss+ Model over the Period January 2014 to January 2022 (Section 9.2)
• MF Global's Repo‐to‐Maturity Trades (Section 10.7)
• US Treasury Futures Basis Trades in March 2020 (Section 11.13)
• Extracting an Implied Path of Short‐Term Rates from Fed Fund Futures, October 2021 versus January 2022 (Section 12.3)
• Tranche Structure of a CLO Issued in May 2019 (Section 14.1)
• Hertz CDS Settlement Auction, June 2020 (Section 14.11)
• The London Whale (Section 14.13)
• Three 30‐Year FNMA Pools, 2018–2021 (Sections 15.5 through 15.7)
• Structure of a Credit Risk Transfer Security Issued in 2020 (Section 15.12)
• Pricing a Callable Bank of America Bond with Black‐Scholes‐Merton, August 2021 (Section 16.1)