Fixed Income & Corporate Bonds

Course overview In recent years, the fixed income markets have witnessed significant change and innovation, and substantial growth in the corporate bond market, arising in large part from the reduced availability of finance from the more traditional sources of corporate debt capital as a result of the global financial crisis. In addition, the increasing commoditisation of the swaps market, along with recent innovations in the credit derivatives market, has led to fundamental shifts in core relationships. 'Fixed Income & Corporate Bond' course is directed at those who require up-to-date market knowledge on how such changes will impact their professional lives. The course is intensive, requiring a high level of commitment from the delegates. Summary of course content Review of recent bond market developments Bond analytics: Pricing and risk management The importance of the yield curve and the information it conveys The importance of convexity and how it is priced in the market Real vs. Nominal returns - the case for inflation linked bonds The corporate bond market Defining the credit spread The role of the interest rate swaps market in price discovery The importance of the CDS market Understanding of credit ratings and the role of the credit rating agencies PC-based pricing, trading and risk management exercises Methodology The course will be taught using a combination of lectures, case studies, practical workshops and PC-based exercises. Computer-based exercises All delegates should bring their laptops to facilitate in-class studies and exercises. Course Level Delegates should be familiar with the basics of bond mathematics, measures of return, characteristics of bonds and bond market conventions. Whilst a review of the basics will take place on Day 1, the course will move to an intermediate level thereafter. Delegates are likely to have some previous practical experience of fixed income trading, risk management, operations, structuring/origination or investment/analysis. Who should attend this training course? This course is key for professional working in: Fixed Income Corporate finance/Corporate treasury Capital markets Investment management Audit/product control/Risk management/ALM Securitisation/Syndication/Structured finance Money markets/Repo Systems programming Government/Agency funding and investment Regulation or compliance documentation Supporting publications:
Day 1 Market Instruments Introduction to Fixed Income Securities Investment vs commercial banking What is a bond? Who issues and invests Bond characteristics Coupon: fixed, floating, zero coupon bonds (“strips”) Price/yield relationship The major Government bond markets The Eurobond market MTN issuance programmes Bonds with embedded options Callable and putable bonds Convertibles Synthetic Bonds Inflation-Linked Bonds: Real vs Nominal Returns Rationale for issuance Market size Mechanics explained US Treasury Inflation Protected Securities (TIPS) Alternative methodologies: UK “Linkers” explained Real vs nominal returns What about deflation? What are the (hidden) risks? The role of inflation linked bonds in portfolio construction Day 2 Bond Analytics: Valuation & Yield Curve Analysis Fixed Income Valuation Time value of money explained PV’s; FV’s; and annuities Simple interest vs compound interest Nominal vs real returns Calculating a bond’s price on a coupon date Clean (quoted) vs dirty price Common accrual conventions Calculating a bond’s price on a non-coupon date Interpreting the price: defining yield measures Yield to maturity as an internal rate of return (IRR) Yield to call Running yield Case study: Delegates will price various fixed income instruments Yield Curves The yield curve and yield curve theories Econometric forecasting of the yield curve What is the “benchmark curve”? Understanding the Zero Coupon Curve The problem with YTMs Re-investment ris Understanding the zero-coupon bond pricing concept and its importance in the marking-to-market process Constructing the zero-coupon equivalent yield curve The government bond “strip” curve Using zero-coupon discount factors in the price discovery process Case study: Delegates will derive the zero-coupon curve and use it to value a number of instruments Day 3 Bond Analytics: Price Sensitivity 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, PVBP (Present 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 analytic software to understand fixed income exposures and the role convexity plays Convexity 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: Delegates will use duration and convexity measures to determine a bond’s return in a changing yield curve environment Day 4 The Swaps Markets The Swaps Market Swap types: Interest, currency and basis swaps Market structure Market quotation convention Accrual conventions Rationale for the swap market Using swaps to aid asset/liability management Swaps and the primary (new issue) debt market New issue arbitrage using currency swaps Creating synthetic FRNs: the asset swap Understanding the credit bond/swap relationship The Credit Default Swap (CDS) Market Development of the CDS market Market rational How the users have changed over time Insurance or a derivative Current market developments Big and Small Bang Move to fixed coupon from par spreads Implications Understanding the link between the CDS price and implied probability of default Day 5 Corporate Bonds & Credit Spread Analysis Corporate Bonds & Understanding the Spread Macro drivers of the credit spread Measuring the credit spread Yield spread over the benchmark and I-spread Deriving the asset swap spread Par-par vs yield asset swaps What is the Z-spread Asset swap spread vs Z-spread The role of the credit default swap (CDS) in pricing new issues and relative value analysis Relationship between CDS, asset swap, and repo Understanding negative and positive CDS basis Which spread to use? Taking into account the term structure of default probabilities: “Arbitrage” pricing spread Corporate Bonds & the Rating Process The role of the rating agencies What is a rating? Issuer vs 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 the Credit Spread Hedging with government bonds and futures referenced to the government curve Setting up the hedge ratio The problem with traditional approaches Using CDS’s to hedge spread risk Portfolio approaches with iTraxx contractsv