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This chapter examines the specific problems associated with the application of arbitrage theory to the bond market. It focuses on zero coupon bonds, also known as pure discount bonds, of various maturities. Practice exercises are included.

This chapter examines the problem of how to model an arbitrage free family of zero coupon bond price processes. It assumes a market for T-bonds for every choice of T, and that the market is arbitrage free. For every T, the price of a T-bond has the form p (t, T) = F (t, r, (t) ; T), where F is a smooth function of three real variables. Practice exercises are included.

The clearest picture of the term structure of interest rates is obtained by looking at the yields of zero-coupon bonds of different maturities. However, in most countries almost all traded bonds are coupon bonds, not zero-coupon bonds. This chapter discusses methods to extract or estimate a zero-coupon yield curve from the prices of coupon bonds at a given point in time. In the U.S. and some other countries, zero-coupon bonds can be traded, but for various reasons most analysts and dealers prefer to work with a zero-coupon yield curve extracted from the prices of the coupon bonds. The methods discussed in the chapter are bootstrapping, cubic splines, and the Nelson–Siegel parameterization.

Diary extracts and correspondence, thematically arranged, with extensive footnotes identifying newspaper coverage and parliamentary speeches, dealing with Woolton’s policies and actions on rationing against the background of the development of the Battle of the Atlantic. It gives insights into the challenge of maintaining supplies given the toll on shipping, the negotiations with key groups such as farmers, the challenge of maintaining staff morale at Colwyn Bay (including the discreet visits there made by Woolton for this purpose), revealing also the key roles played by men like Sir Henry French and John Redcliffe Maud. Entries and speeches reveal Woolton’s frustration with party politics and the Civil Service in other departments, as well as with key figures like Churchill and Robert Hudson Spear.

Diary extracts and correspondence, thematically arranged, with extensive footnotes identifying newspaper coverage of Woolton’s policies and actions on rationing, as the Battle of the Atlantic continued, with the added complication of the entry of the USA into the war, given the impact on supply management. The toll on shipping continued to provide a challenge to imports from the Empire. Woolton’s continuing consciousness of the importance of media-related strategies of explain and so gather public support for Ministry policies (including changes in rations) is revealed, and his continuing frustration with party politics, fellow politicians and other departments (including Agriculture) are revealed. The challenges of engaging with Churchill are shown to have continued, while his positive relations with the Royal Family continued.

This chapter examines one of nine critical forces behind purchase decisions that make mobile advertising so powerful: time. It addresses questions such as: How can advertisers use time to their advantage to reach their target audience? Now that smartphones give advertisers the opportunity to reach an individual consumer in real time, what is the secret to getting the timing and the ad right? What is the best way to deliver a timely advertisement that will trigger a positive response? The chapter discusses advertising effectiveness based on time of day, advertising effectiveness based on day of the week, effectiveness of coupon redemption windows, the relationship between redemption windows and geography, and mobile advertising and its effect on different stages of the purchase funnel.

This chapter argues that, in parallel with the many other ongoing changes in the US financial structure, the obligations of the national government should take a new and innovative form. It proposes a small-denomination GDP share paying a coupon each year of one-trillionth of that year’s GDP, or about $14.60 at current levels. On this basis, it suggests the name “Trill” be used to refer to this new security. Similar to shares issued by corporations paying a fraction of corporate earnings in dividends, the Trill would pay a fraction of the “earnings” of the United States. Trills would have coupon payments that would rise in an expansion, be of value to investors, and, most importantly, for the U.S. government would decline in a recession with declining tax revenues, in contrast to existing debt vehicles.

This essay engages two strains of Tolstoy’s writing. In the first, the sight of death is the foundation of ethical understanding; in the second, if ethical understanding is practiced, there is no death of any consequence. The latter half of the essay turns to Bresson’s L’Argent, a filmic adaptation of Tolstoy’s “The Forged Coupon” which transforms Tolstoy’s gospelized ethics to an immanent ethics, raising the question of whether ethics is phenomenal and embodied (as in Levinas and Derrida) or whether it is evental (as in Badiou). An examination of aspects of Wittgenstein’s writing on ethics, T. J. Clark’s The Sight of Death, and Tolstoy’s fable “Alyosha Gorshok” sharpen the consideration of whether ethics is natural or supernatural.

This chapter introduces non-Monte Carlo methods of MBS valuation including closed-form solution of the OAS equation. Authors consider different specifications of prepayment function and illustrate how the solution can be designed. The Active-Passive Decomposition model is introduced in a backward inducting scheme over a probability tree, or a finite difference grid. Finite difference methods in single- and multi-dimensional spaces of factors are described. The chapter discusses the issue of modeling mortgage market (“current-coupon”) rate. It compares statistical methods (an empirical function of other reference rates) to those connecting to the OAS valuation principle. Finally, it introduces valuation with a universal refinancing S-curve defined as a function of loan price rather than interest rates.

This chapter discusses the role of accrual bonds in the collateralized mortgage obligation (CMO) market. The accrual bond is a long-dated bond which is structured in such a way that it does not pay its coupon interest until it begins to pay principal. Rather, the principal balance accrues by the stated coupon amount on each payment date while the actual interest payments are redirected as principal payments to those bonds having a higher principal payment priority—the target bonds. Structurally speaking, the presence of an accrual bond serves two purposes: to manage the average life profile of the target bonds, and “clean-up” tail cash flows. The chapter examines the mechanics of the traditional Z bond as well as Z bonds issued with agency planned amortization class (PAC), and highlights the behavior of these structures under different prepayment scenarios.

This chapter explores the different types of floating-rate mortgage securities, their structural characteristics, and their valuation. It also provides an overview of the current floating-rate mortgage securities markets. Floating-rate securities (or floaters) are securities with coupon (or interest) rates that periodically change over the life of the instrument. They are collateralized by mortgage loans or (other) mortgage securities, and include passthroughs backed by adjustable-rate mortgages (ARMs) and floating-rate tranches of collateralized mortgage obligations (CMOs). As with other mortgage securities, when valuing floaters, one needs to make assumptions regarding the future behavior of interest rates, prepayments, and, in the case of non-agencies, losses on the underlying collateral. Common tools in analyzing floaters are discount margin, option-adjusted spread, index duration, and spread duration.

This chapter discusses inverse floating-rate securities, which are leveraged securities that offer investors a floating-rate coupon that periodically resets off an index. In contrast to floating-rate collateralized mortgage obligations (CMOs), the coupon on an inverse floater changes by a specified multiple of the change in the index, decreasing when the index rises and increasing when the index falls. This unusual feature makes inverse floaters unique among mortgage securities. Inverse floating-rate CMOs are carved out of a collateral pool in three steps: splitting the cash flow into a principal-only (PO) bond and a fixed bond, from that fixed bond creating a floating-rate bond and an inverse floating-rate interest-only (IIO) bond, and by combining the PO bond with the IIO bond.

This chapter analyzes modeling prepayments and the defaults for mortgage-backed securities (MBS) valuation. Embedded in MBS are two options—the option to pay off the loan prematurely and the option to default on it. The option to prepay is typically exercised when a borrower sells their house or when they refinance their mortgage. Since a borrower will generally refinance to lower their mortgage rate, an investor winds up receiving principal early when interest rates fall and they are forced to reinvest at lower rate. If rates rise, however, the investor is stuck with the stated coupon’s yield. Borrowers also default on their mortgage and tend to do so only when the value of their property is below the amount they owe. For most non-agency MBS, the associated loss will be passed directly to investors. However, in all cases, a defaulted mortgage is removed from the pool and its payments cease.

This chapter discusses the descriptive and valuation issues in the customized mortgage-backed securities (MBS) markets. The concept of custom MBS is based upon identifying obligor and property attributes that result in superior performance. Traditional stratification factors have been the age of loans, gross weighted-average coupon (WAC), and geographic location. Custom MBS have also been created based on attributes such as loan size, occupancy status, credit quality characteristics (such as FICO score), and loan-to-value ratios. The effect on prepayments of a combination of these factors results in a multiplicative effect of the convexity characteristics of the subject MBS. Customized pools have also been used as collateral for structured MBS transactions, with pricing on certain tranches such as interest-only (IO) securities predicated on the advantageous prepayment behavior of the loans.

In this chapter the reader is introduced to the basic concepts of interest rate theory. Starting with a market for zero coupon bonds we define the relevant interest rates such as the short rate, the spot rates, and the forward rates. There is an in-depth study of the relations between the dynamics of these rates, and we also discuss some more applied topics as fixed coupon bonds, floating rate bonds, yields, duration, and convexity.

This chapter examines John Rawls’s critique of welfare-state capitalism. The republican focus on liberty as non-domination that Rawls shares with liberal-republicanism explains its most controversial claims. An argument is identified that has been used to deflate the originality and significance of a property-owning democracy. It has been argued that, given that it shares so many features with a welfare state, a property-owning democracy can be only an expansion of welfare-state capitalist institutions with some ad hoc asset-based policies. This argument is undermined and the difference between the basic minimum payable under justice as fairness and a universal unconditional basic income is explained. Both are compared and contrasted with the liberal-republican restructuring of the market as a whole. Attempts to revise welfare-state capitalism so that it is equally capable of realizing justice are criticized and the concept of reciprocity clarified.

John Rawls argued this conception of justice as fairness could be equally well expressed by one of two social systems: a property-owning democracy or liberal market socialism. This chapter argues that this claim needs to be disambiguated: a property-owning democracy must be implemented first or market socialist schemes will become illiberal over time. The chapter evaluates two form of mandatory market socialism: one in which worker cooperatives lease their capital from the state and one in which workers hold capital as partners in their workplace. Both schemes, it is argued, generate new forms of exploitation compared to either free market capitalism or a property-owning democracy. A property-owning democracy is further compared with John Roemer’s coupon socialism as a policy approach in transitional justice and with Robert Hockett’s proposal to expand asset-based egalitarianism via state underwritten insurance.