Euromoney Audit Training

Course Overview

In recent years, the fixed income markets have witnessed significant change and innovation, resulting from factors such as the rapidly maturing swaps market and demand for structured products. The increasing commoditisation of the swaps market, along with recent innovations in the credit derivatives market, has led to fundamental shifts in core relationships. The course is directed at those who require up-to-date market knowledge on how such changes will impact their professional lives. The programme is intensive, requiring a high level of commitment from the delegates. The course will be taught using a combination of lectures, case studies, practical workshops and pc-based exercises.

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 One, 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.

Summary of course content 

• Review of modern bond, money and repo markets
• Bond analytics: pricing and risk management
• Fixed income derivatives: bond futures pricing and applications
• Fixed income structured products:
• Capital and income protected notes
• Reverse / inverse floating rate notes
• Callable and puttable bonds
• Range notes and range accrual notes
• PC-based pricing, trading and risk management exercises

Methodology

At each point in the course, learning is consolidated through practical exercises. Delegates are required to bring their own laptop and financial calculator.

Who should attend?

The course will be of value to professionals in the following areas :

• Corporate finance / Corporate treasury
• Capital markets
• Audit / product control / risk management / ALM
• Research and analysis
• Sales and trading
• Investment management
• Origination
• Securitisation / syndication
• Structured finance
• Money markets / repo
• Systems programming
• Funding
• Government / agency funding and investment
• Regulation / compliance / documentation

Supporting publications

 

DAY ONE: The securities marketplace

The securities marketplace

• What is investment banking?
• Investment vs. commercial banking
• Financial markets and their products
• Risk vs. return

How the bond markets work

• What is a bond?
• Who issues and invests?
• Bond characteristics
• Coupon: fixed, floating, zero
• Price / yield relationship
• Inflation-linked securities
• Credit rating agencies

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

DAY TWO: Bond analytics – pricing and risk analysis

Yield curves

• Interpreting the price: defining yield measures
• Yield to Maturity (YTM) 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?

The role of the zero-coupon curve

• The problem with YTMs
• Re-investment risk
• Understanding the zero-coupon bond pricing concept and its importance in the marking-tomarket
  process
• Constructing the zero-coupon equivalent yield curve
• Bond stripping
• Using zero-coupon discount factors to mark-tomarket positions
• Using the zero curve
• Identifying miss-priced bonds
• Horizon yield analysis

Introduction to bond risk management

• Why measure interest rate exposure?
• What influences a bond’s price?
• Macaulay duration
• The convexity adjustment
• Present value of a basis point
• Calculating the hedge ratio

DAY THREE: Fixed income derivatives

The swaps market

• Swap types: interest, currency and basis swaps
• Market structure
• Market quotation conventions
• 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
• Using swaps as interest rate risk management tools
• Rationale for use

The bond futures contract

• The principal 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
• Government bond futures: contract limitations
• Alternative derivative instruments
• Futures referenced off the swaps curve
• Bond index products

Applications of bond futures

• Trading and risk management applications
• Creating synthetic investments with bond futures contracts
• Alternative instruments: Swapnote® futures contracts

DAY FOUR: Fixed income structured products (1)

The building blocks

• Rationale and concept of structured notes
• Market participants: who issues and invests
• Structure and design
• Collateralised asset swap: example
• Collared FRN: example

Unravelling a structured note: reverse / inverse floating rate notes

• When to issue
• Defining the issuer hedge
• Pricing and valuation
• Variations
• Deferred inverse floater
• Step-up inverse floater
• Superfloater FRN
• Next generation products

Callable and puttable bonds

• Bond securities with embedded options: callable; puttable; convertible; and exchangeable bonds
• Rationale for issuance
• Attractions to investors
• Using swaptions to monetise options embedded in callable and puttable bonds
• Introduction to swaptions
• Using swaptions to create synthetic callable / puttable bonds
• Step-up and multi-step callable bonds
• Concept
• Investor motivation

DAY FIVE: Fixed income structured products (2)

Synthetic bonds (1): capital and income protected notes

• Constructing capital protected notes
• Typical structures
• Currency linked notes
• Equity linked notes
• Variations
• Introducing a cap
• Basket structures
• Ladders
• High income bonds: income protected notes
• Putting together a reverse convertible
• Understanding the risks for the investor

Range notes and range accrual notes

• Rational
• Construction
• Prima on digital options
• Pricing digital options
• Building a range note
• Building a range accrual note
• Understanding the market conditions conducive to issuance

• 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

  • Derivatives Workshop

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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