JWBK067-IND JWBK067-Banks December 21, 2005 17:52 Char Count= 0

Index

ABS, see Asset-backed securities CLO, see Collateralized loan obligations

Accrual bonds, 84 Closed-end funds, 193–195
Adjustable convertible notes, 178 CMBS, see Commercial mortgage backed
Adjustable rate preferred stock, 177–178 securities
ARPS, see Adjustable rate preferred stock CMO, see Collateralized mortgage obligations
Asset-backed securities (ABS), 90–98 Collared FRNs, 105
Asset swaps, 231–234 Collateralized debt obligations (CDOs),
Asset swaptions, 238 121–140
Asset switches, 237 Development and market drivers, 121–123
Product mechanics and applications,
Backwardation, 23 123–140
Balance sheet and arbitrage CDOs, 134–135 Balance sheet and arbitrage CDOs,
Basis swaps, 28 134–135
Bonds with debt warrants, 107 Cash flow and market value CDOs,
Bonds with [equity] warrants, 172–173 133–140
Break forwards, 227 Collateralized bond obligations (CBOs),
Butterflies, 217–218 131–133
Buy/write securities, 173–177 Collateralized loan obligations (CLOs),
130–131
Calendar spreads, 219–220 Synthetic and structured CDOs, 135–140
Call option, 29–30 Collars, 226
Callable, puttable, and stripped securities, 45–58 Collateralized bond obligations (CBOs),
Development and market drivers, 45–47 131–133
Product mechanics and applications, 47–58 Collateralized loan obligations (CLOs), 130–131
Callable bonds, 47–52 Collateralized mortgage obligations (CMOs), 60,
Puttable bonds, 52–53 83–90
Stripped securities, 53–58 Commercial mortgage backed securities (CMBS),
Callable asset swaps, 235–236 60, 79–83
Callable bonds, 47–52 Committed capital facilities, 156–157
Callable credit default notes, 116 Commodity-linked notes and loans, 109–110
Callable, puttable, and extendable swaps, Condors, 218–219
224–226 Constant prepayment rate (CPR), 65
Caps, 32–37 Contango, 22
Catastrophe bonds, 147–151 Contingency loans, 158–159
CBO, see Collateralized bond obligations Contingent capital structures, 153–162
CDO, see Collateralized debt obligations Contingent debt, 156–159
CDOs-squared, 140 Contingent equity, 159–162
CDS index tranches, 139–140 Contingent premium options, 230
CLN, see Credit-linked notes Contingent surplus notes, 157–158

263
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264 Index

Convertible bonds and equity hybrids, 163–179 Financial building blocks, 9–43
Development and market drivers, 163–165 Concepts, 9–16
Product mechanics and applications, 165–179 Risks, 9–11
Bonds with [equity] warrants, 172–173 Time value of money and interest rates,
Buy/write securities, 173–177 11–16
Convertible bonds and variations, 166–172 Derivative instruments, 16–37
Other equity hybrids, 177–179 Exchange-traded derivatives, 36–38
Convertible bonds, 166–172 Futures, 37
Convertible preferred stock, 178–179 Futures options, 37–38
Convexity, 14–16 Options, 37–38
CPR, see Constant prepayment rate OTC derivatives, 16–36
Credit arbitrage, 25–27 Options, 29–36
Credit default swaps, 113–114, 238 Forwards, 17–24
Credit derivatives and synthetic credit positions, Swaps, 24–29
238–245 Financial engineering, 43
Credit-linked notes (CLNs), 113–119, 135–136 Host securities/liabilities, 38–39
Credit risk, 10 Private placements, 38–39
Credit spread forwards, 114, 240–241 Public notes, 38
Credit spread notes, 115 Issuing/repackaging vehicles, 39–43
Credit spread options, 114, 239–240 Investment companies, 42–43
Currency-linked notes, 107–109 Special purpose entities (SPEs), 40–41
Currency swaps, 287 Trusts, 41–42
Federal Home Loan Mortgage Corporation
Default notes, 115 (FHLMC), 59, 71–72
Derivative replication, repackaging, and Federal National Mortgage Association (FNMA),
structuring, 205–245 59, 71–72, 88
Development and market drivers, 205–207 FHLMC, see Federal Home Loan Mortgage
Product mechanics and applications, 207–245 Corporation
Asset swaps, liability swaps, asset swap Floors, 32–37
packages, 231–238 FNMA, see Federal National Mortgage
Callable, puttable, and extendable swaps, Association
224–226 Forward interest rates, 14–16
Credit derivatives and synthetic credit Forward rate agreement (FRA), 19–21
positions, 238–245 Forward swaps, 228–229
Multi-option strategies, 215–219 Forwards, 17–24
Multiple swap/option positions, 214–215 FRA, see Forward rate agreement
Other structured derivatives, 226–231 Fund of funds, 197
Swaptions, 220–224 Futures, 37
Synthetic long and short options and swaps, Futures options, 37–38
207–214
Differential swaps, 229 GNMA, see Government National Mortgage
Dual coupon currency swaps, 230 Association
Dual currency bonds, 108–109 Government National Mortgage Association
Duration, 13 (GNMA), 59, 71–72
Guaranteed investment contract, 53
Earthquake bonds, 148–149
Equity-linked notes, 110–113 Hedge funds, 195–200
ETFs, see Exchange-traded funds Hurricane bonds, 148
Exchange-traded funds (ETFs), 200–203
Exchangeable bonds, 172 IAR [swap], see Index amortizing rate swap
IAS 39, See International Accounting Standards
FAS 133, See Financial Accounting Standards 39
133 ILS, see Insurance-linked securities
Financial Accounting Standards 133 (FAS 133), Index amortizing rate (IAR) swap , 225
257–259 Insurance-linked securities (ILS), 144–153
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Insurance-linked securities and contingent capital,
141–162
Development and market drivers, 141–143
Product mechanics and applications, 143–162
Contingent capital structures, 153–162
Contingent debt, 156–159
Contingent equity, 159–162
Insurance-linked securities (ILS),
144–153
Catastrophe bonds, 147–151
Noncatastrophe bonds, 151–153
Interest coverage, 129
Interest only (IO) [strip], 53–58, 60, 88–89
Interest rate-linked notes, 104–107
Interest rate swaps, 24–27
International Accounting Standards 39 (IAS 39),
257–259
International Swaps and Derivatives Association
(ISDA),
Framework, 250–255
Master Agreement, 251
Inverse floaters, 104
Investment companies, 42–43
Investment funds, 181–203
Development and market drivers, 181–184
Product mechanics and applications,
184–203
Closed-end funds, 193–195
Exchange-traded funds (ETFs), 200–203
Hedge funds, 195–200
Open-end funds, 186–193
IO [strip], see Interest only [strip]
ISDA, see International Swaps and Derivatives
Association
Knock-out floater, 106
Knock-out forwards, 227–228
Leveraged inverse floaters, 104–105
Liability swaps, 234–235
Life insurance securitization, 152–153
Liquidity risk, 10
Loss equity puts, 159–161
Mandatory convertible bonds, 172
Market risk, 10
Maturity shortening, 118
MBS, see Mortgage-backed securities
Mortgage- and asset backed securities, 59–98
Development and market drivers, 59–62
Product mechanics and applications, 62–98
Asset-backed securities, 90–98
Credit card securitizations, 91–94
Home equity loan securitizations, 94–95
Other asset-backed securitizations, 95–98
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Index 265
Mortgage-backed securities, 62–90
Collateralized mortgage obligations,
83–90
Pass-through securities, 69–83
Mortgage-backed securities, 62–90
Multiple peril bonds, 149–150
Noncatastrophe bonds, 151–153
OAS, see Option adjusted spread
Open-end funds, 186–193
Operating risk, 10
Option adjusted convexity, 50–51
Option adjusted duration, 50
Option adjusted spread (OAS), 50, 67–68
Options, 29–36
Overcollateralization, 128–129
PAC, see Planned amortization class [bond]
Pass-through securities, 69–83
PERCS and synthetic PERCS, 176–177
Pfandbrief, 76–77
Planned amortization class (PAC) [bond],
86–87
PO [strip], see Principal only [strip]
Prepayments, 62–67
Price spreads, 216
PRIMES and SCORES, 175–176
Principal only (PO) [strip], 53–58, 60, 88–89
Put-call parity, 36
Put option, 30
Put-protected equity, 161–162
Puttable asset swaps, 236–237
Puttable bonds, 52–53
Range floaters, 106
Ratchet collared FRNs, 105
Real estate investment trust (REIT), 70
REIT, see Real estate investment trust
Repackaged bonds, 117
Residual value bonds, 151–152
Reverse convertible bonds, 172
Risk, legal, and regulatory issues, 247–259
Legal controls, 249–255
ISDA documentation framework, 250–255
Regulatory and accounting issues, 255–259
Accounting treatment, 257–259
Regulatory capital, 255–257
Regulatory review, 257
Risk and financial controls, 247–249
Internal audit, 249
Internal financial and operational controls,
248–249
Market, liquidity and credit risk
management, 247–248
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266 Index
Semi-fixed swaps, 228
Separate Trading of Registered Interest and
Principal Securities (STRIPS), 46
Single tranche CDOs, 138–139
SLMA, see Student Loan Marketing Association
Soft bullet, 93, 96
Special purpose entity (SPE), 40–41
Special purpose reinsurer (SPR), 143
SPE, see Special purpose entity
SPR, see Special purpose reinsurer
Step-up notes, 107
Straddles, 216
Strangles, 216–217
Stripped securities, 53–58
STRIPS, see Separate Trading of Registered
Interest and Principal Securities
Structured notes and loans, 99–119
Development and market drivers, 99–102
Product mechanics and applications, 102–119
Commodity-linked notes and loans, 109–110
Credit-linked notes (CLNs), 113–119
Currency-linked notes, 107–109
Equity-linked notes, 110–113
Interest rate-linked notes, 104–107
Student Loan Marketing Association (SLMA),
97
Superfloater swaps, 230
Swaps, 24–29
Swaptions, 220–224
Synthetic and structured assets
Development of, 2–3
Char Count= 0
Drivers of activity, 3–5
New product design, 6–7
Synthetic and structured CDOs, 135–140
Synthetic asset positions, 212
Synthetic bonds, 119
Synthetic equity warrants, 113
Synthetic interest rate and currency swaps, 215
Synthetic option positions, 212
TAC, see Targeted amortization class [bond]
Targeted amortization class (TAC)[bond], 87–88
Time value of money, 11–16
Total return swap (TRS), 114
Total return swap credit-linked notes, 115
Trade credit securitizations, 152
TRS, see Total return swap
Trusts, 41–42
UIT, see Unit investment trust
Unit investment trust (UIT), 194, 200
VADM, see Very Accurately Defined Maturity
[bond]
Very Accurately Defined Maturity (VADM)
[bond], 88
Waterfall, 127
Weather bonds, 151
Windstorm bonds, 149
Zero coupon convertible bonds, 171