Day 1
Bond analytics (1): valuation & yield curve analysis
Introduction to fixed income securities: Classifying bonds
– What is a bond?
– Who issues and invests?
– Bond characteristics
– Coupon: fixed, floating, zero coupon bonds (“strips”)
– Price/yield relationship
– Inflation linked securities
– Bond securities with embedded options: callable; puttable; convertible; and exchangeable bonds
– Rationale for issuance
– Attractions to investors
– Other bond types: synthetics and securitised bonds
Bond mathematics: fixed income valuation & yield measures
– Introduction to bond maths and the time value of money (TVM)
– 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
– Interpreting the price: defining yield measures
– Yield to maturity as an internal rate of return (IRR)
– Yield to call
– Running yield
The yield curve
– Identifying different types of yield curve
– The yield-to-maturity curve
– Par yield curve
– Zero coupon (spot) yield curve
– Forward curve
– The yield curve and yield curve theories
– Pure expectations theory and other theories
– Econometric forecasting of the yield curve
– What is the “benchmark curve”?
Day 2
Bond Analytics (2): 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
– Relationship between convexity and interest rate volatility
– Option embedded bonds
– Price sensitivity characteristics of callable & puttable bonds
– Duration and convexity of callable bonds
– Limitations of duration and convexity: assumptions, benefits & shortcomings
– Using convexity: bar-ball v bullet portfolios
Day 3
Portfolio management & trading strategies (1)
Managing portfolio risk: hedging bond portfolios
– 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
– Yield curve risk explained
– Credit spread risk
– New developments
– Key-rate duration analysis
– Futures referenced off the inter-bank curve
Bond hedging simulation
Participants will use bond analytic software to hedge a portfolio of bonds against adverse interest rate movements
Day 4
Portfolio management & trading strategies (2)
Fixed income portfolio management & bond trading strategies
– Passive v active bond portfolio management
– Market timing strategies
– Horizon (rolling yield) analysis
– Riding the yield curve
– Using repo to trade the curve
– Timing bets on interest-rate level
– Timing bets on specific changes in the yield curve
– Bullet, barbell and ladder strategies
– Butterfly strategy
– Trading on market inefficiencies:
– Identifying mis-priced bonds using zero coupon bond analysis
– Understanding the mechanics of bond swaps and switches
– Performance measurement
– Return measures
– Risk-adjusted performance evaluation
Fixed income portfolio simulation
Delegates, in groups, will manage a bond portfolio over time, adjusting their portfolio to match trustee requirements and their interpretation of economic data. Performance will be judged on a risk adjusted basis
Summary and close