Fixed Income Securities: Tools for Today's Markets

Citation

Tuckman, B., & Serrat, A. (2022). Fixed Income Securities: Tools for Today's Markets (4th ed.). John Wiley & Sons.

Chapter Summary

The fourth edition runs to about 560 pages: a Chapter 0 overview, sixteen chapters, a set of appendices that each belong to a chapter, and a website. Wiley describes the book as presenting an overview of fixed income markets, the conceptual frameworks and quantitative tools used for pricing and hedging, and a range of instruments: government bonds, swaps, repurchase agreements, interest rate futures, bond and note futures, bond options and swaptions, corporate bonds, credit default swaps, and mortgages and mortgage-backed securities. The order of chapters follows that arrangement: first prices and rates, then risk measures and hedging, then term-structure models, then individual markets.

Chapter 0: Overview

A 48-page survey of fixed income markets that precedes the numbered chapters. The fourth edition updates it, according to the publisher, to cover monetary policy with abundant reserves and the growing electronification of markets.

Chapters 1–3: Prices, Discount Factors, and Arbitrage; Swap, Spot, and Forward Rates; Returns, Yields, Spreads, and P&L Attribution

The pricing foundation. Chapter 1 starts from the cash flows of fixed-rate government coupon bonds, extracts discount factors from bond prices, and shows that the law of one price and arbitrage pricing amount to the same thing as discounting. Using US Treasury prices on one date, it also shows where the theory fits the market imperfectly, then introduces STRIPS, accrued interest and day-count conventions. Chapter 2 develops swap, spot and forward rates. Chapter 3 turns to returns, yields and spreads and to attributing profit and loss.

Chapters 4–6: DV01, Duration, and Convexity; Key-Rate, Partial, and Forward-Bucket '01s and Durations; Regression Hedging and Principal Component Analysis

The risk-measurement block. Chapter 4 defines DV01, duration and convexity, Chapter 5 refines them into key-rate, partial and forward-bucket measures that respond to different movements of the curve, and Chapter 6 uses regression and principal component analysis to hedge when rates do not move in parallel. Chapter 6 has a longer appendix (about eight pages).

Chapters 7–9: Arbitrage Pricing with Term Structure Models; Expectations, Risk Premium, Convexity, and the Shape of the Term Structure; The Vasicek and Gauss+ Models

The models block. Chapter 7 introduces arbitrage pricing with term-structure models, Chapter 8 explains what shapes the term structure (expectations, risk premium and convexity), and Chapter 9 presents the Vasicek and Gauss+ models, with a 12-page appendix.

Chapters 10–12: Repurchase Agreements and Financing; Note and Bond Futures; Short-Term Rates and Their Derivatives

Chapter 10 covers repos and financing. Chapter 11, at about 40 pages one of the longest, deals with note and bond futures. Chapter 12 covers short-term rates and their derivatives. Wiley lists the global transition from LIBOR to SOFR and other rates among the new material of this edition.

Chapters 13–14: Interest Rate Swaps; Corporate Debt and Credit Default Swaps

Chapter 13 treats interest rate swaps. Chapter 14, about 48 pages, covers corporate debt and credit default swaps.

Chapters 15–16: Mortgages and Mortgage-Backed Securities; Fixed Income Options

Chapter 15 treats mortgages and mortgage-backed securities, and Chapter 16 closes the book with fixed income options. Both have appendices at the back of the book.

Key Concepts

Chapters 1–3: Prices and rates

• Discount factors: market prices of one unit of currency received on a future date, extracted from bond prices.
• Law of one price and arbitrage pricing: why a bond outside a reference group can be priced from discount factors.
• Spot, forward and swap rates: the three ways of describing the term structure.
• Accrued interest and day-count conventions: the market conventions behind quoted versus full prices.

Chapters 4–9: Risk and models

• DV01, duration, convexity: sensitivity of price to yield.
• Key-rate, partial and forward-bucket durations: sensitivities to specific parts of the curve.
• Regression hedging and principal component analysis: hedging when the curve moves non-parallel.
• Term-structure models: arbitrage pricing, risk premium, the Vasicek and Gauss+ models.

Chapters 10–16: Markets and instruments

• Repurchase agreements: secured financing of bond positions.
• Note and bond futures; interest rate swaps; credit default swaps; mortgage-backed securities; fixed income options.

Critical Analysis

Strengths

• Market-based examples. Wiley emphasises real market examples, and Chapter 1 works on actual Treasury prices from a single date (14 May 2021), including settlement conventions.
• Quantitative tools come before instruments. Pricing, risk measures and hedging (Chapters 1–9) are established before the instrument chapters, so each later market is analysed with the same toolkit.
• Current on market changes. The fourth edition appears a decade after its predecessor and is revised for monetary policy with abundant reserves, electronification, lessons from the pandemic, fixed income asset management and the LIBOR-to-SOFR transition.
• Coverage from government bonds to credit and mortgages in one volume of moderate length.

Limitations

• Quantitative load. Chapters 4–9 bring in regression, principal component analysis and term-structure models, and Wiley positions the book for practitioners and students building a quantitative toolkit; readers without that background will find the middle of the book demanding.
• US-centred worked examples. The sample chapter works entirely with US Treasuries and the US settlement convention, noting that the analytics apply to other sovereign markets.
• Selected topics. The instruments follow the list above; topics such as inflation-linked bonds and municipal debt are not among the chapter titles.

Where It Fits in the Course

In the investments and financial markets course this is one of three fixed income texts and the most compact. Veronesi's Fixed Income Securities is longer, builds term-structure modelling from binomial trees to continuous time, and is organized around exercises and case studies; Sundaresan's Fixed Income Markets and Their Derivatives gives more space to institutions, auctions and market organization. Tuckman and Serrat sit between: a tool-oriented book that moves quickly from pricing and hedging to the main instruments.

Bodie, Kane and Marcus's Investments provides the wider portfolio and asset-pricing context. Read Tuckman and Serrat before Duffie and Singleton's Credit Risk or Hunt and Kennedy's Financial Derivatives in Theory and Practice if you need the market vocabulary and curve mathematics those books assume.

How to Use This Book

It suits graduate and MBA students in finance, and practitioners who need a working framework for pricing and hedging fixed income instruments. Comfort with present value and basic calculus is the starting point; Chapters 6, 7 and 9 ask for more quantitative work.

• Core: Chapters 1–4 in order, then 5–6 if you will hedge a portfolio.
• Models: Chapters 7–9 for term-structure modelling; skip Chapter 9's appendix on a first pass.
• Markets: read the instrument chapters (10–16) in the order your course needs; Chapters 10, 11 and 13 form a natural block on financing, futures and swaps.
• Supporting material: Wiley lists a book website and an instructor site; use the chapter appendices for derivations.