Inside the Yield Book: The Classic That Created the Science of Bond Analysis

by Martin L. Leibowitz, Sidney Homer

First published in 1972, Inside the Yield Book revolutionized the fixed-income industry and forever altered the way investors looked at bonds. More than thirty years later, it remains a standard primer and reference among market professionals. Generations of practitioners, investors, and students have relied on its lucid explanations, and readers needing to delve more deeply have found its explication of key mathematical relationships to be unmatched in clarity and ease of application. This edition updates the widely respected classic with new material by Martin L. Leibowitz that develops a horizon-based approach to present value and shows how these concepts can be generalized beyond bonds to become useful in the analysis of virtually any investment opportunity, including equities. Also included is a new foreword by Henry Kaufman, former vice chairman of Salomon Brothers. Inside the Yield Book explains and makes sense of essential mathematical relationships that are basic to an understanding of bonds, annuities, loans--in fact, any securities or investments that involve compound interest and the determination of present value for future cash flows. In an era of calculators and computers, some of these important underlying principles are not always grasped thoroughly by market participants. Investors, traders, and analysts who want to sharpen their ability to recall and apply these fundamentals will find this book the perfect concise resource. This authoritative work, now significantly expanded, is more instructive, important, and useful than ever for mastering crucial concepts of time, value, and return, and for better comprehending their role within the world of investments, in particular, and finance, in general.

Genres: Finance, Economics

220 pages, Hardcover

First published October 1, 1972

Reviews

[May Ling · Rating 3 out of 5]

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.

[Viktor Nilsson · Rating 4 out of 5]

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.