# Fixed Income Mathematics.

Fixed Income Mathematics is a complete, well-written book that covers a wealth of material useful in evaluating and managing bond and mortgage portfolios. The author, Frank J. Fabozzi, has assembled all of the information one needs, not only to understand the mathematics of fixed-income, flows, but also the relationships between the variables involved.

Part I of the book covers the basic foundations of the mathematics of finance including the time value of money, future value of an investment, present value of an expected cash flow and internal rate of return (yield). The coverage is detailed, providing all of the necessary formulas plus examples to guide the reader through actual calculations. For those familiar with the calculations, it is a worthwhile review.

Part II is a thorough discussion of bond pricing, cash flows and yield determination. Traditional yield measures are evaluated so that the reader understands their limitations. The concept of horizon return, which encompasses all of the potential sources of dollar return and which may be different from maturity value, is introduced.

Part III is of particular interest to mortgage bankers concerned with hedging operations and risk management. The characteristics that determine price volatility are discussed, as well as the importance of duration and convexity in anticipating potential price performance. Again, formulas and examples are included.

Part IV rounds out fixed-income calculations with a discussion of bonds with call options, mortgages, mortgage pass-through securities and strips. An extensive discussion is included on the effect of prepayments on mortgage cash flows using constant prepayment rate (CPR), Public Securities ties Association (PSA) and single monthly mortality (SMM) prepayment models.

Fixed Income Mathematics is technically accurate and pedagogically sound. The only modification I would recommend is including use of the financial calculator. Calculator application can, however, be integrated by the reader and spreadsheets prepared using the formulas provided in each section. The book should be included in every mortgage banker's library, and is an excellent academic reference.
COPYRIGHT 1992 Mortgage Bankers Association of America
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