Bond Analysis - Advanced II

• Bond Analytics
• Zero Coupon Analysis
• Pricing FRN’s and Capital Market Floaters
• Pricing Inflation-Linked Bonds
• Principal Components Analysis
• Analysis of Callable Bonds
• Pricing High-Yield Bonds
• Advanced Portfolio Strategies

The objective of this seminar is to give the participants a good understanding of and “hands-on” experience with advanced, state-of-the-art toolkits for analyzing bonds and sophisticated bond investment strategies. We shall start with a brief review of “traditional” bond analytics and explain how the expected return of a bond portfolio can be modeled as a Taylor-series of second and higher orders. We shall then explain in depth how zero coupon curves can be derived from observable market prices and how such curves can be used to price different bond structures, including Floating Rate Notes. We also look at how inflation-linked bonds are priced, and how implied inflation expectations can be backed out of observable prices. Next, we will show how you can use Principal Components Analysis on historical yield curve data to identify statistically significant and independent return factors. We will also explain how you can use these factors and their associated “factor loadings” for trading and risk management purposes. We will then look at how callable bonds and bonds with pre-payment options (e.g. Mortgage Backed Securities) can be valued using term structure models, pre-payment models and Monte Carlo Simulation. We will also show how to calculate option-adjusted key-ratios such as Option-Adjusted Yield, Option-Adjusted Spread, Option-Adjusted Duration, Static Spreads etc. Next, we will discuss how “High Yield” bonds (i.e. low-rated corporate and emerging markets bonds) can be analyzed with explicit consideration of default probabilities, recovery rates, covenants, and collaterals. Finally, we will present and explain some advanced strategies for managing bond portfolios, based upon the above analytics.

 

Day One

09.00 - 09.15  Welcome and Introduction

09.15 - 12.00  Review of Bond Analytics

• Price and Yield Analysis
• Risk Analysis
• Portfolio Analysis

Zero Coupon Analysis

• Spot Rates vs. Coupon Yields
• The Par Curve
• Constructing the Spot-Rate Curve
• Bootstrapping
  • Cubic Spline Smoothing
  • Forward Rates
• Using the Yield Curve to Price Bonds
• Exercises

12.00 - 13.00  Lunch

13.00 - 16.30  Pricing Floaters

• General Features of Floaters
• Discounted Margin Model
• Valuing Floaters using Forward Rates
• Price Sensitivity of Floaters
• Valuing Inverse Floaters and CMS Floaters
• Small Exercises

Pricing Inflation-Linked Bonds

• Types of Inflation-Linked Structures
  • TIPS
  • Bonds with deflation protection
• Estimating the Cash-Flow
• Real and Nominal Yield
• Backing out Inflation Expectations
• Inflation-Adjusted Risk
• Exercises

Day Two

09.00 - 12.00  Principal Component Analysis

• Common Factors Affecting Bond Returns
• Overview of Multi-Factor Interest Rate Risk Models
• The Factor Model
  • Eigenvalues, Eigenvectors and the Yield Curve
  • Calculating and Interpreting Factor Loadings
• Using the Factor Model to Calculate VaR for a Bond Portfolio
• Factor Immunization for Hedging Yield Curve Fluctuations
• Monte Carlo Simulation Using PCA
• Exercises

12.00 - 13.00  Lunch

13.00 - 16.30  Analysis of Callable Bonds

• Price Yield Relationship of Callable Bonds
• Price-yield diagram
  • Why duration can be negative
  • Why convexity can be negative
• A Generalised Model for Valuing Bonds with Embedded Options
• Pre-Payment Models
• Binomial Interest Rate Trees
• Option-Adjusted Analysis
  • Option Adjusted Yield and Duration
  • Option Adjusted Spread
  • Effective Duration
• Using Monte Carlo Simulation to Analyze Callable/Pre-payable Bonds
• Exercises

Day Three

09.00 - 12.00  Analysis of High-Yield Bonds

• The High Yield Market
• High Yield Security Valuation
  • Factors Affecting the Spread
  • Modelling the Yield of Non-Investment Grade Bonds
• High Yield Security Risk Analysis
  • Historical Default and Recovery Rates
  • Rating Migration and Credit Quality Correlation
  • Modelling Bond Rating Changes for Credit Risk Estimation
• Case Study: Using CreditGrades™ to Value Corporate Bond
• Exercises

12.00 - 13.00  Lunch

13.00 - 16.00  Advanced Bond Trading and Investment Strategies

• Portfolio Optimisation
  • Single-Period Immunisation
  • Multi-Period Immunisation
• Yield Curve Plays
• International Bond Investing
  • Currency-Hedged Bond Investments
  • Constructing Global Bond Portfolios
• High Yield Portfolio Management
• Market-neutral Strategies
• Convertible Arbitrage
• Investing in Asset-Backed Securities
• Exercises

Evaluation and Termination of the Seminar