Advanced Fixed Income Products: Convertibles, Inflation-Linked and Option-Embedded Bonds

• Convertible Bonds – Markets and Instruments
• Pricing and Risk Analysis of Convertible Bonds
• Inflation-Linked Bonds, Swaps and Options
• Callable, Putable and Pre-Payable Bonds
• Capped Floaters and Multi-Callable Capped Floaters
• Ratchet and Cliquet Structures
• CMS-linked Notes and other Option-embedded Structures

The objective of this practical, advanced-level seminar is to give you a good understanding of the mechanics, investment characteristics, pricing and risks of a range of “non-vanilla” bond structures.

We start with a thorough introduction to convertible bonds, and we explain the motives for using these types of bonds for financing and investing purposes. We then take a closer look at different convertible structures, including standard convertibles, bonds with embedded warrants, mandatory convertibles, exchangeable bonds, contingent convertibles and more “exotic” structures. We explain – using detailed examples and computer simulations – how the structures are priced and risk assessed. Key ratios such as “conversion ratio”, “conversion price”, “parity”, and “conversion premium” are explained, and we discuss techniques for investing in convertible bonds.

Further, we then look at the rapidly growing market for inflation-linked products. We explain the features of these bonds and illustrate with a number of examples, including Treasury Inflation Protected Securities (TIPS). We explain how nominal and real yield is calculated, and we discuss how investment portfolios can be risk-return enhanced by inclusion of these securities. We also look at some more recent inflation-linked products, including inflation swaps and inflation options, and we explain their possible uses in managing the asset-liability risk in pension funds and life insurance companies.

Further, we explain and demonstrate how bonds with embedded options such as callable and putable bonds and bonds backed by prepayable mortgages can be analyzed using analytical and numerical techniques. We also look at Collaterized Mortgage Obligations and other mortgage derivate instruments.

Finally we present and analyze a number of additional option-embedded bonds, including capped floaters, multi-callable capped floaters, and step-up callable notes, inverse floaters, callable snowball notes and CMS-linked notes.

 

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Convertible Bonds

• General Introduction to Convertible Bonds
• Convertible Bond Markets
• Convertible Structures
• Convertible Terms and Ratios
  • Conversion Price and Conversion Ratio
  • Parity and Conversion Premium
• Small Exercise
• Financing with Convertible Bonds
• Pricing and Risk Analysis
  • Valuing the Bond and Equity Components Separately
  • An Integrated Model for Convertible Bond Valuation
  • Sensitivities to Risk Factors
• Investing in Convertible Bonds
• Convertible Arbitrage
• Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Inflation-Linked Bonds, Swaps and Options

• What Are Inflation-Linked Securities and Derivatives?
• Inflation-linked Bonds
  • Capital Indexed Bonds
  • Interest Indexed Bonds
  • Current Pay Bond
  • Indexed Annuity Bond
  • Indexed Zero Coupon Bond
  • Case Study: Investing in Treasury Inflation Protected Securities (TIPS)
• Inflation Swaps
  • Mechanics, Pricing and Hedging
  • Using Inflation Swaps to Hedge Pension Liabilities
  • Inflation-guaranteed and Inflation-linked Retail Products
• Inflation Options
  • Mechanics, Pricing and Hedging
  • Using Inflation Options for Trading and Hedging

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Callable, Putable and Pre-Payable Bonds

• General Introduction to Bonds with Embedded Interest Rate Options
• Callable and Putable Bonds
  • Building Blocks
  • Valuation Models
  • Option Adjusted Analysis
  • Hedging Call and Put Risk with Swaptions
• Small Exercise
• Bonds with Pre-Payment Options
  • Mortgage-Backed Securities
  • REMICs, CMOs and other Mortgage Derivatives
  • Contraction and Extension Risk
  • Prepayment Analysis
  • Valuation Using BDT Model
  • Valuation Using Monte Carlo Simulation
  • Hedging Prepayment Risk
• Small Exercise

12.00 - 13.00 Lunch

13.00 - 16.00 Structured Bonds and Notes

• Capped and Collared Floaters
  • Standard Capped/Floored Floaters
  • Leveraged Capped/Floored Floaters
  • Superfloaters
  • Multi-Callable Capped Floater
• Step-Up and Step-Down Notes
  • Ratchet and Cliquet Structures
• Inverse Floaters
• Callable Snowball Notes
• CMS Floaters
• Targeted Redemption Notes
• Range Accrual Notes
• Other Types of Option-embedded Bonds and Notes
• Small Exercise

Evaluation and Termination of the Seminar