Euromoney Audit Training

In recent years the bond markets have witnessed significant change and innovation, largely as a result of a rapidly maturing swaps market. The increasing commoditisation of the swaps market, along with recent innovations in the credit derivatives market, has led to fundamental shifts in core relationships. This Euromoney Training course is tailored to those who require up-to-date market knowledge on how these particular changes will impact on their professional lives.

How this course will assist you?

In 6-days you will expand your knowledge on the structure and application of bonds and fixed income products and will gain an in-depth understanding of:

• Classification of bond instruments
• Yield curve analysis
• Pricing methodologies
• Interest rate and currency swaps: uses and valuation
• Bond trading and portfolio applications
• Securitisation and asset-backed securities
• Repo markets
• Financial engineering with swaps
  

Who should attend?

Professionals working in:

• Corporate Finance /Corporate Treasury
• Capital Markets
• Audit / Product Control /Risk Management / ALM
• Research & Analysis
• Sales & Trading
• Investment Management
• Origination
• Funding & Investment
• Government / Agency

Supported by:

 

Day 1

The cash market

Session 1: introduction to fixed income securities- classifying bonds

• What is a bond?
• Who issues and invests
• Bond characteristics
• Coupon: fixed, floating, zero
• Price/yield relationship
• Inflation linked securities
• Bond securities with embedded options: callable; puttable; convertible and exchangeable bonds
• Rationale for issuance
• Attractions to investors
• Synthetic bonds

 

Session 2: the primary market - the new issue process

Guest speaker: Chris O’Malley, consultant, International Primary Markets Association (IPMA)

Syndication

• The early years
• The ‘bought deal’
• The ‘fixed price re-offer’
• US developments
• The ‘pot’ system

Pricing and launch

• The mandate
• Pricing
• Launch
• 'Bookrunner’ and IPMA match
• Stabilisation
• Expenses

Distribution and closing

• The roadshow
• Distribution and allotment
• Closing procedure
• Current issues

Optional evening session

Time value of money revisited

Day 2

Bond analytics (1): valuation and yield curve analysis

Session 1: yield curves and fixed income valuation

• 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
• The yield curve and yield curve theories
• Econometric forecasting of the yield curve
• What is the “benchmark curve”?
• What drives credit spreads?

Case study: price various fixed income instruments

Session 2: the role of the zero coupon curve

• The problem with yield to maturity:
• 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
• Bond stripping
• Using zero-coupon discount factors to mark-to-market positions
• Using the zero curve:
• Identifying miss-priced bonds
• Horizon yield analysis

Case study: derive the zerocoupon curve and use it to value a number of instruments

Optional evening session

Valuing fixed income securities with embedded options

• Creating a valuation framework
• Building the rate tree
• Deriving the bond’s price

Day 3

Bond analytics (2): price sensitivity

Session 1: 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

Session 2: bond risk simulation Participants will use bond analytic software to understand fixed income exposures and the role convexity plays.

Session 3: convexity

• Convexity defined
• Calculating convexity for fixed coupon bonds
• The implications and ‘value’ of positive and negative convexity
• Relationship between convexity and interest rate volatility
• Option embedded bonds
• Price sensitivity characteristics of callable and puttable bonds
• Duration and convexity of callable bonds
• Limitations of duration and convexity: assumptions, benefits and shortcomings
• Using convexity: bar-ball vs. bullet portfolios

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

Session 4: fixed income repo markets

Guest speaker: Richard Comotto, Visiting Fellow, ISMA Centre

• The fundamentals of repo markets
• The mechanics of repo agreements
• Classic repo vs. buy / sell-back
• Securities lending
• PSA/ISMA documentation
• Bilateral, hold in custody (HIC), tri-party repo structures
• LCH repo clear
• Margin ‘haircut’ agreements
• General (GC) and special (SC) collateral; rights of substitution
• Comparison of alternative repo mechanisms
• Basic repo mathematics
• Essential price and interest calculations
• Users and applications of repo in bond markets
• Bond financing with repo; advantages and constraints
• Short selling
• Market determinants of ‘special ’ issues
• Yield enhancement techniques using repo

Day 4

Fixed income derivatives

Session 1: bond futures contracts (1) - design and pricing

• The principle contracts and where they trade
• The role of Exchanges and the Clearing House
• Understanding the margin payments
• Introducing the contract spec
• The deliverable basket concept
• The price/conversion factor
• Pricing methodologies
• Understanding the “cheapest-todeliver” concept
• Calculating the “cash-and-carry” arbitrage
• Determining the implied repo rate

Session 2: fixed income futures derivatives simulation

Case study: use bond futures software to understand the futures price dynamic.

Session 3: bond futures contracts (2) - advanced topics

• What determines the futures price?
• Understanding the “basis”
• Net vs. carry basis
• What are the embedded options?

Session 4: using risk management tools

• Hedging fixed income securities
• Measuring position risk
• Defining the hedge instrument: what makes a “good” risk management tool?
• Calculating the hedge ratio
• The role of repo when hedging with cash bonds
• Hedge imperfections
• The role the net basis plays
• Yield curve risk explained
• Credit spread risk
• New developments
• Key-rate duration analysis
• Futures referenced off the inter-bank curve

Optional evening session

Use a bond analytic computer package to design:

• A suitable duration and convexity weighted hedge of a bond portfolio

Day 5

Swaps and the income markets

Session 1: swap instruments

• Swap types: interest, currency and basis swaps
• Market structure
• Quotation conventions
• Accrual conventions
• Rationale for the swap market
• Analysing swaps

Case study: demonstrate the rationale for the swaps market through a worked example.

Session 2: integrating swaps and fixed income products

• 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
• Using swaps as interest rate risk management tools
• Rationale for use
• Defining the hedge ratio
• The Euronext:liffe SwapNote® futures contract

Case study: demonstrate how swaps are used in practice.

Course dinner

Day 6

Swaps and structured products

Session 1: pricing and valuation considerations

• Determining a consistent pricing methodology approach
• Understanding the role of the “zero” curve
• Deriving the inter-bank curve
• Pricing and marking-to-market interest rate and currency swaps

Case study: mark-to-market a number of swap positions.

Session 2: using swaps in structured products

• The financial engineering process
• Rationale
• Role of the intermediary
• Fund management applications
• Building an asset package in practice
• Cross currency examples
• Bonds with variable coupons: step-up and step-down bonds
• Taking advantage of falling rates: inverse floating rate notes
• Reverse engineering: using swaps to create the structure
• Worked example
• Market environment conducive to issuance

Case study: build a reverse floating rate note.

Session 3: structured fixed income products

• Securitisation and asset backed securities
• Securitisation defined

• Market driving forces

Example: collateralised debt obligations (CDO’s).

Course summary and close

• Paul Kitching

  Before becoming a freelance training consultant, Paul Kitching was the Strategic Development Manager at the London International Financial Futures Exchange (LIFFE), where he was responsible for the research and definition of new specialist swap and risk transfer contracts. Prior to this, he was Head of Interest Rate Product Development with responsibility for the maintenance of the existing product range and the development of new products.
  
  Paul began his career with Ernst & Young and Grant Thornton as a tax specialist, before moving into corporate treasury management at Consignia where he was project leader for a treasury and risk management group. In this role he developed risk management protocols and procedures for the use of derivative products. He was responsible for recommending the optimal combination of product types and features for a wide range of situations.
  
  Following the completion of a quantitative finance masters degree, Paul became senior lecturer in Corporate Finance and Taxation at the University of Greenwich. He is a visiting lecturer to Cass Business School, lecturing on their Executive MBA programme. He is a panel member for the Securities Institute, and is a Member of the Association of Corporate Treasurers and associate of the Institute of Taxation.

  Courses run by this instructor

  • London School of Derivatives

School of Bonds & Fixed Income Products

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

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