The IFF School of Bonds and Fixed Income

This course aims to give you a complete practical grasp of the fixed income capital markets so that as international finance evolves and is reshaped by the changing nature of banking, additional regulatory pressures and the continued shifts brought about by the rebalancing of global economic forces, you will be in a strong position to seize the inevitable opportunities which arise.

Both of the trainers take a highly practical approach to finance and you will learn how the bond markets work by analysing existing transactions taken from the fixed income markets. Some of the deals will be less than 24 hours old when you see them, emphasising how the markets work today.

The programme has been carefully researched and designed to reflect the current challenges fixed income professionals face in the markets. This intensive training course, through case study analysis, practical examples and hands-on workshops, will give you the opportunity to improve your understanding of all aspects of bonds and fixed income. Designed to optimise your skills, the in-depth market-focused tuition will give you the edge in a competitive market and guarantee you outstanding results.

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Day 1

Day one of the programme will be centred on an intensive guide/refresher on the mechanics of bond and fixed income products. After getting to grips with the fundamentals, the learning curve gradually becomes steeper as we cover more complex issues.

Overview of Capital Markets

Case Study: FMC Corporation 5.2% December 2019

Bonds and Fixed Income Mechanics

• Discounted cash flow
• Capital markets maths
• Money market maths
• Market conventions
• Bond mathematics
• 3 applications widely used in the markets
  - calculating future values
  - calculating present values
  - calculating implied repo rates
• Yield curve assumptions and their implications for bond pricing
• Using financial calculators (HP12Cs, HP17BII’s and HP19BII’s, Casio FC-100, TI BAIIPlus)
• Annual, semi-annual and quarterly rates

Market Conventions and Conversions

• Conventions
  - ISMA Bond Basis (30E/360 and Actual/Actual)
  - US Bond Basis (30/360)
  - US Money Market Basis (Actual/360)
  - UK Money Market Basis (Actual/365F)
  - UK Money Market Basis Variation (Actual/365)
  - US Treasury Basis (Actual/Actual)
• Conversions
  - converting from 360 to 365 and vice versa
  - converting from 30/360 to Actual/360 and vice versa

Pricing Principles

• Approximate NPV of a trade
• Precise NPV of a trade
• Intrinsic values, in-, out- and at-the-money
• Identifying winners and losers
• Brearley and Myers and the principles of corporate finance

Exercise: Approximating bond prices mentally

Practical Bond Pricing Techniques

• What moves interest rates
• What influences yield curves
• A macro approach to pricing fixed rate bonds
• The value of one basis point for different maturities: PV01s and DV01s
• Inverse proportionality: prices and yields

Exercise: Approximating bond prices mentally

Exercise: Swire Pacific 6.25% April 2018

• Multiple discount rates
• Forward rates and zero curves
• Zero coupon bonds
• High yield bonds

The Bond Markets Today

• Impact of the credit crisis
• Origination
• Trading
• Sales
• Investor perceptions
• Regulatory considerations

Case Study: Pricing a recent bond issue

Case Study: Calculating clean and dirty bond prices
Verizon 7.375% September 2012
US Treasury 3.375% November 2019

Group Exercise: Trading the yield curve (1) – curve steepeners and curve flatteners

Day 2

Day two sees the programme initially continuing with the practical pricing theme from the previous day while making links between the pricing of fixed rate bonds and floating rate notes. The programme will then move into some of the more specialist instruments. The second half of the day will focus on the understanding of bond sensitivities.

Pricing Floating Rate Notes

• Parallels with fixed rate bonds
• Discount margins, IRRs and YTM
• Changes in the market
• Changes in the credit

Exercise: Approximating floater prices mentally

• Using Bloomberg to price floaters
• Using a single discount rate
• Using multiple discount rates
• Forward rates and zero curves
• The relationship between swaps and floaters
• High yield floaters

Case Study: Calculating clean and dirty floater prices
Millenium BCP, EURIBOR + 90 December 2012

Understanding Bond Sensitivities

• The importance of risk management
• Bond pricing review
• Macaulay Duration
  - capital loss and income gain from interest rate movements
  - break-even analysis
  - time-weighted average of discounted cash flows
  - sensitivity of duration for different bonds
  - maturity
  - coupon
  - yield
• Time decay of duration
• Modified duration
  - price-yield relationship
  - approximation of price changes
• Convexity
  - estimating convexity
  - measuring convexity
  - dynamic hedging

Group Exercise: Trading the yield curve (2) - duration weighted curve flatteners

Day 3

Day three begins by considering the practical uses and applications of duration including bond portfolio management, hedging and duration-based trades as well as examining the use of repos and reverses in the bond markets. The second half of the day will start with an overview of the vital capital adequacy requirement for banks and then will provide a detailed practical guide to swaps linking them to futures, options and other derivatives.

Using Duration as a Hedging or Trading Technique

• Risk and interest rate sensitivity
• Calculating the present value of one basis point

Exercise: Calculating the PV01 of a bond position

• Using Macaulay's Duration
• Using modified duration
• The relationship between duration and PV01
• The additivity of duration

Case Study: Using duration to calculate hedge ratios; Curve trading

Bond Portfolio Management

• Using duration as a portfolio management tool
• Managing interest rate risk
• Lengthening and shortening portfolio duration
• Asset and liability matching

Getting to Grips with Repos and Reverses

• Types of repos and reverses
• Classic
• Buy/sell-back
• Securities lending
• Economic similarities to FX swaps

Exercise: Calculating repo prices

• General collateral
• Specific repo
• Specials
• Tri-party repo

Case Study: The use of repos and reverses

Introduction to Interest Rate Derivatives

• Capital adequacy requirements
  - The Basle Accord, Basel II and proposals for Basel III
  - the balance sheet approach to risk
  - capital adequacy requirement
  - risk weights
  - market risk
  - off -balance sheet instruments and interest rate derivatives
  - the corrective measures
  - credit risk
• Interest rate, currency and credit default swaps
  - the swap mechanism
  - the uses of swaps and other derivatives
         * speculation
         * hedging and asset and liability management
         * market making
         * risk management
         * arbitrage
         * debt origination
         * asset swaps
• Interest rate risk management with swaps compared to other interest rate derivatives
• Swaps and futures
  - swaps and FRAs
  - swaps and caps, floors and collars

Day 4

Day four sees the course moving into other essential areas in the bonds and fixed income field, beginning with strips and asset backed securities the course will then move on to provide in-depth coverage of yield curves and swaps. During the case study in the afternoon we will go through debt origination and pricing bond including all the issuance fees. The importance of swaps in the issuing procedure will be finally highlighted. We will rap up the session with an overview on Asset-Backed Securities.

Use Strips as a Benchmark for Pricing Non-Standard Bonds

• Pricing bonds revisited
• TIGRs, CATS, LIONs, GATORS, COUGARS, DOGS, TRS STRIPS
• Stripping and reconstituting bonds
• Pricing examples

Term Structure of Interest Rates

• The yield curve
• The par curve
• The zero curve
• Bootstrapping
• Calculating the zero rates
• The forward curve
• Three approaches for calculating the implied forward rates
• Creating a term structure of interest rates
• The importance of par rates

Case Study: Working out the term structure of interest rates

• Selecting the yield curve
• Bootstrapping
• Building a zero-coupon curve
• Implying the forward rates
• Summarising the forward rates

Case Study: Debt origination

• Issuing bonds under fixed price re-offer
• Syndication
• Setting the re-offer spread
• Finding the re-offer yield
• Issue price
• All-in-costs to borrower
• Spread over treasuries
• Adding the swap and reaching sub-libor funding

Liability Swaps and the Bond Markets

• Debt origination
• Fixed rate bonds versus floating rate notes
• Arbitrage possibilites
• The benefit of swaps
• The swap window of opportunity
• Sub-libor funding for prime borrowers

Asset-Backed Securities

• Collateralised Mortgage Obligations (CMO)
• Receivables (CARDs), (CARs) etc.
• Credit-Linked Notes (CLN)
• Asset-Backed Commercial Paper (ABCP)
• Wrapped bonds

Day 5

The final day of the programme is also one of the most intensive. Starting with the uses and applications of asset swaps, you will master the complexities of swap pricing and valuation. This day also includes comprehensive case study covering the pricing of Asset Swaps before we summarise the entire programme.

Asset Swaps and Bond Markets

• The drivers of the asset swap market
• The different asset swap structures

Swap Pricing

• The cash flow
• Determining the value of the variable cash flow
• The swap pricing condition
• Determining the rate of the fixed cash flow

Swap Valuation

• Valuation of the floating rate leg
• Valuation of the fixed rate leg
• Determining the net present value

Credit Curves and Benchmarking

• The swap rate as key part of the term structure of interest rates
• How it all fits together
• Benchmarking over Government bonds
• Benchmarking over swaps and CDS
• Benchmarking over libor

Case Study: Asset swap pricing and valuation

• Pricing an asset swap for par bonds
• Pricing an asset swap for premium bonds
• Pricing an asset swap for discounted bonds
• Comparing Asset Swap Spread to z-spread

Summary / Review: "A swap is not a swap”
 

What you will learn by attending this programme:

• How to estimate bond prices without a calculator
• The links between FRN and straight bond pricing
• The relationship between loan pricing and bond pricing
• The basis link between cash bonds and credit derivatives
• How to evaluate structured products
• About each building block in the bond market and their related topics with clearly worked examples
• A vivid overview of the entire financial markets, the arbitrage opportunities and the dominant role of bonds and swaps
• How the structure of interest rates is the backbone of any financial market instrument