Day 1

Bond Analytics – An Introduction to Fixed Income Securities

• Bond Structure (Coupon, Yield, Maturity, Price.  etc)
• Who issues and invests?
• Bond characteristics
• Coupon: fixed, floating, zero coupon bonds (“strips”)
• Price/yield relationship

Basic Bond Maths

• Compounding and Discounting
• Deriving spot rates from par rates
• Deriving forward rates from spot rates
• Yield curve analysis

Case Study: Pricing a Bond (Excel)

We look at a selection of bonds with various maturity and yields and calculate their price

The major Government bond markets – The Risk Free Rate

Case Study: Participants are given various Government Yield Curves from countries around the World to view and understand

 The Eurobond Market

• MTN issuance programme
• Corporate bond issuance
• Yield Curves, Term Structure & Fixed Income Valuation

Exercise: Participants are given a number of Bond Positions to value, given their YTM. As the market moves they will calculate the bonds Profit or Loss.

Calculating a bond’s price on a coupon date

• Clean (quoted) v dirty price
• Common accrual conventions
• Calculating a bond’s price on a non-coupon date

Yield to Maturity :

• Formula and application
• Yield to call
• Running yield
• The yield curve and yield curve theories
• What does Quantitative Tightening (QT) mean for the world?

Exercise: Econometric forecasting of the yield curve… A look at the economic numbers that affect the curve, from Inflation and CPI to GPD, Unemployment etc, across the globe. Participants are asked to interpret their meaning, given the current economic environment. Where will rates go next?

Repo Markets

• Repo Trades
• GMRA (General Master Repurchase Agreements)
• Beneficial and Legal Ownership
• Term, Margining, Haircuts, Repo Rate
• Overnight v Term
• Matched Book

Scenario based Case Study: Funding a Long Bond Position with a Repo. Participants are given a bond position and asked to calculate how much of the funding of the position can be achieved in the Repo market.

Reverse Repo

• Covering a short bond position
• Specials

Day 2 -  Bond Analytics

The Zero Coupon Curve and Bond Market Risk

• The problem with YTM and Re-investment risk
• Understanding the zero-coupon bond pricing concept and its importance in the marking-to-market process
• Constructing the zero-coupon equivalent yield curve (Bootstrapping)
• The government bond “strip” curve
• Using zero-coupon discount factors in the price discovery process

Exercise: Participants will derive the zero-coupon curve and use it to value a number of instruments.

Fixed Income Market Risk Analysis

Price-yield relationship for option-free bonds

• Determinants of bond price sensitivity
• Measures of bond price sensitivity:
• Macaulay Duration
• Modified Duration
• Dollar Duration, PV01 (Present Value of a Basis Point)
• DV01 (dollar Value of a Basis Point)
• Calculation and interpretation of duration
• The non-linear properties of duration: time, yield and coupon dependencies
• Calculating the duration of a bond portfolio

Bond Simulation: Participants will use bond Excel to price and understand Fixed Income Exposures, Duration Risk and the role convexity plays.

Convexity defined

• Calculating convexity for fixed coupon bonds
• The implications and ‘value’ of positive & negative convexity on market yields
• Relationship between convexity and interest rate volatility
• Limitations of duration and convexity: assumptions, benefits & shortcomings

Case study: Participants will use duration and convexity measures to determine a bond’s return in a changing yield curve environment

Trading the Yield Curve:

• 2 v 10 year Spread
• Calculating the Ratio using Duration

Exercise: Participants look at the current USD Yield Curve and decide what trade they would like to create. Using what they have learnt on the course, they then price the trade and calculate the Duration Ratio.

Hedging Interest Rate Risk

• IRSs and their uses
• IRS Pricing
• IRS Hedge Ratio

Exercise: Participants use excel to hedge a bond with an IRS

Day 3  - Analysis of Corporate Bonds & Understanding the Spread

Yield Pick-Up from Trading Credit: Corporate Bonds & the Credit Spread

Macro drivers of the credit spread

• Measuring the credit spread
• Yield spread over the benchmark and I-spread
• Deriving the asset swap spread

Exercise: Pricing an Asset Swap using Excel.

• What is the Z-spread?
• Asset swap spread v Z-spread
• CDS trade
  • Buyer / seller, Fee, Contingent Payment
  • Reference Entity, Reference Obligation
  • Credit Events ( Bankruptcy, Failure to pay etc)

• The role of the Credit Default Swap (CDS) in pricing new issues and relative value analysis
• Relationship between CDS, asset swap, and repo

Exercise: Pricing a CDS from the Asset Swap and Repo Markets. Participants find the arbitrage opportunities and calculate the potential profit.

• Understanding negative and positive CDS basis
• Which spread to use?
• Taking into account the term structure of default probabilities: “arbitrage” pricing spread

Corporate Bonds and the Rating Process

• The role of the rating agencies
• What is a rating?
• Issuer v issue ratings
• Ratings watch & outlook
• What factors drive the rating
• Empirical performance
• Default frequencies
• Rating transition tables
• Recovery rates
• The importance of sovereign ratings
• Hedging Interest Rate Risk & the Credit Spread

Hedging Interest Rate Risk with government bonds and futures

• Setting up the hedge ratio
• The problem with traditional approaches
• Using CDS’s to hedge spread risk
• Portfolio hedging approaches with iTraxx contracts

Day 4 - Selecting Instruments for Outperformance - Credit Linked Notes & Securitisation

Creating a CLN

The market for securitised products - Asset Backed Securities (ABS)

• Overview of principal terms and features of a “typical” securitization
• Pooling of eligible receivables
• Establishment of the SPV and sale of the assets
• Credit enhancement alternatives
• Regulatory capital issues
• Key rating agency considerations
• Use of FX and interest rate derivatives to eliminate cash flow mismatches
• The Tranches and their pay-offs
• Risks and rewards
• Liquidity risk

Case Study: Building a CLO. We look at how a Collateralised Loan Book would be built. What are the advantages in terms of returns? What are the hidden risks?

Issuance patterns pre and post the crisis

• Motivation for issuers and investors
• Cash flow v synthetic instruments
• Balance sheet v arbitrage deals

Embedded Options

• What is a callable bond?
• Investor motivation: identifying the yield enhancement
• Hedging strategies for the issuer using swaptions
• Why issue step-up callable bonds
• A generalised template for valuing bonds with embedded options
• Understanding the nature of the embedded option
• Building an arbitrage-free rate tree
• Valuing a vanilla bond using the rate tree
• Applying the technique to callable bonds
• Extending the analysis to bonds with other embedded options

Case study: Participants will use market data to derive a “fair” valuation for a callable bond

Convertible Bond Arbitrage

• How do convertible bonds work?
• Understanding the terminology
• Establishing the arbitrage trade
• Understanding the key risk factors of a convertible arb trade
• How well has the trade worked in the past?
• Practical example of an arb trade
• Inflation-Linked Bonds: Real v Nominal Returns

Rationale for Bond / Securities Issuance

• Market size
• Mechanics explained
• US Treasury Inflation Protected Securities (TIPS)
• Inflation-linked markets
• Real v nominal returns
• What about deflation?
• What are the (hidden) risks?
• The role of inflation linked bonds in portfolio construction

Day 5  - Portfolio Management Strategies and ESG:

Yield Enhancement, Trading Strategies and Structured Products.

The Green Bond Market.

Trading the Yield Curve to Enhance Yield

• Horizon (total return) analysis
• Calculating the total return
• Determining the exit price
• Choosing the optimal bond maturity for the trade
• Understanding the role of the forward rate
• Riding the yield curve: Using repo to generate gains

Case study: Participants will calculate the holding period return and yield pick-up

Trading Strategies

• Convexity bias and the yield curve
• Basics of convexity
• What factors influence convexity
• Volatility and the value of convexity
• Taking advantage of convexity: Barbell – bullet analysis
  • Bull Spread Steepener
  • Bear Spread Flattener
  • Bar Bell

Exercise: Participants are given a current yield curve and asked to create a strategy to make most profit from an expected move or mispricing.

The Green Bond Market

• ESG/SRI and Impact Investing
  • What is ESG investing?
  • What is Socially Responsible Investing?
  • A new way of thinking for investors
• Green and Social Bonds
• Sustainable Bonds
• Blue Bonds
• Sustainability Standards and Labels
• What are the investors objectives?
• Difference between Green and Climate Bonds
• Transition bonds explained
• COP21 Paris Agreement
• Identifying assets and projects that deliver a low carbon economy
• ICMAs Green Bonds Principles
• Voluntary Guidelines for Issuing Green Bonds
• Use of Proceeds
• Second Part Opinion
• Verification and Certification
• Green Bond Scoring/Rating
• EBRD Green Transition Bond

Course summary and close

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