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Inside the Yield Book: Tools for Bond Market Strategy
Explains the significance of interest-on-interest and introduces the concept of realized compound yield, which can be used to predict future bond values
205 pages, Hardcover
First published October 1, 1972
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Displaying 1 - 2 of 2 reviews
September 30, 2016
In it's time, this was probably the single best book on the subject. For that it deserves a read. However, since that time, many other authors have extracted the brilliance of the original authors insight into smaller more digestible pieces.
It's a great intro piece that could be followed up with more modern books on the subject.
It's a great intro piece that could be followed up with more modern books on the subject.
March 13, 2022
This book has gone through three editions which make up its three independent parts, each with its own focus:
- Part 1 (1972) criticizes the concept of yield to maturity (YTM) for not being representative of real world outcomes. YTM assumes coupons are being reinvested at the original yield, which is rarely the case. It further explores bond price sensitivity to interest rates and shows that maturity is a poor estimate for this sensitivity. It points to the fact that all bonds (except for 0 coupon bonds) don't actually tie up capital for as long as the stated maturity, since coupons are partial repayments of the total return.
- Part 2 (2003) introduces the concept of duration and expands the analysis of return volatility.
- Part 3 (2014) introduces the concept of duration targeting (constantly replacing aging bonds with newer one to maintain a stable overall duration of the portfolio). It analyzes portfolios of bonds (rather than individual bonds) and explore how these are affected by changing interest rates. It shows that a portfolio that maintains a constant maturity will, for each period of a specific length of time, on average give returns commensurate with YTM at the beginning of each such period.
The book is quite technical overall, and doesn't cover all of the important aspects of bond investing, so if you want a primer on how to invest in bonds, this is not it. No statement is left unsubstantiated, but the reader gets to follow through all the reasoning and math that gets us there. In fact, each claim is often explored and supported from many different angles, both theoretically and empirically, which is excellent if you want to understand things at depth, rather than just "get the answer".
I would say that going through all the authors' reasoning in reaching their conclusions is a very worthwhile effort if you are into building models for valuing securities, which any really serious investor should do to some extent. I'm too inexperienced in bonds to say whether the conclusions still represent the state of the art in this field today however.
The first part starts of at a very basic level, and the third part reaches levels of quite a bit of complexity, so you will need some undisturbed thinking-time to get through this book. I wouldn't say it's inaccessible however, since the everything in between is very clearly explained.
I would recommend this book for readers who want a historical perspective on bonds and valuation models, or to anyone who wants to explore the development of such ideas in general.
- Part 1 (1972) criticizes the concept of yield to maturity (YTM) for not being representative of real world outcomes. YTM assumes coupons are being reinvested at the original yield, which is rarely the case. It further explores bond price sensitivity to interest rates and shows that maturity is a poor estimate for this sensitivity. It points to the fact that all bonds (except for 0 coupon bonds) don't actually tie up capital for as long as the stated maturity, since coupons are partial repayments of the total return.
- Part 2 (2003) introduces the concept of duration and expands the analysis of return volatility.
- Part 3 (2014) introduces the concept of duration targeting (constantly replacing aging bonds with newer one to maintain a stable overall duration of the portfolio). It analyzes portfolios of bonds (rather than individual bonds) and explore how these are affected by changing interest rates. It shows that a portfolio that maintains a constant maturity will, for each period of a specific length of time, on average give returns commensurate with YTM at the beginning of each such period.
The book is quite technical overall, and doesn't cover all of the important aspects of bond investing, so if you want a primer on how to invest in bonds, this is not it. No statement is left unsubstantiated, but the reader gets to follow through all the reasoning and math that gets us there. In fact, each claim is often explored and supported from many different angles, both theoretically and empirically, which is excellent if you want to understand things at depth, rather than just "get the answer".
I would say that going through all the authors' reasoning in reaching their conclusions is a very worthwhile effort if you are into building models for valuing securities, which any really serious investor should do to some extent. I'm too inexperienced in bonds to say whether the conclusions still represent the state of the art in this field today however.
The first part starts of at a very basic level, and the third part reaches levels of quite a bit of complexity, so you will need some undisturbed thinking-time to get through this book. I wouldn't say it's inaccessible however, since the everything in between is very clearly explained.
I would recommend this book for readers who want a historical perspective on bonds and valuation models, or to anyone who wants to explore the development of such ideas in general.
Displaying 1 - 2 of 2 reviews