Fixed Income Markets and Analytics

Fixed Income (debt) markets are a very large, and essential, part of the financial market place.

In this hands-on programme, you will gain a definitive understanding of the structure of primary and secondary markets, government bonds, corporate bonds and derivative products. The course also covers all the “Bond Maths” building blocks of fixed income analytics – present value, discount factors, yield, yield curves, duration and convexity – and their applications.

The programme includes extensive practical exercises using Excel spreadsheets to ensure that participants can apply the learning immediately.

This course is designed for anyone who needs to learn about Fixed Income markets & products and who needs to learn about the analytical tools required to value and/or manage the risk of individual fixed income securities or of a fixed income portfolio. Additionally, this course is for anyone who wishes to gain a basic understanding of Interest Rate Derivatives and how to use them.

• Fixed Income sales and traders
• Fixed Income portfolio managers
• Bank Treasury, Insurance Company, Pension Fund and Asset Liability Management employees
• Central Bank and Government Funding managers
• Company finance executives and Capital Markets investment bankers
• Risk managers, finance, IPV professionals, auditors and accountants

• Gain familiarity with the terminology and workings of the Primary and Secondary markets for fixed income products
• Understand the details of the various debt products – money market instruments, government bonds, corporate bonds
• Learn the meaning and importance of – and how to calculate – the various analytical functions such as discount factors, present value, price, yield, yield curves, duration and convexity
• Learn how to calculate and manage risks associated with individual instruments or a fixed income portfolio
• Explore primary Interest Rate Derivative products – Futures and Interest Rate Swaps

Basic understanding of Capital Markets at the level covered in extensive detail in the LFS Capital Markets Fundamentals course.

Primary Markets

• DCM and bond issuance
  • Considerations for first time issuers
  • Bonds vs. loans
  • The issuance process – auctions vs. underwritten deals
    • New issue terminology
• Bond types, structures and market conventions
  • Types of bonds, MTNs
  • Fixed rate bonds vs. FRNs
• Understanding the yield curve
  • The various yield curves that we look at
  • Drivers of shape and level

Secondary Markets: Pricing and Risk

• Coupon, price, yield
  • Clean vs. dirty prices, accrued interest calculations
  • Price/yield relationship and PV01
  • The price of liquidity
    • On-the-runs vs. off-the-runs – is there an arb?
• Bootstrapping the curve
  • Discount curve, zeros and the par curve
    • Pricing a new issue
    • Identifying arbitrage opportunities
  • ‘Coupon-stripping’ and trading US STRIPS

Workshop: Bootstrap a Govt bond curve, and thereby correctly price a new issue

• Duration, convexity and risk
  • Duration, modified duration and Macaulay duration
    • Duration at the portfolio level
  • From (mod) duration to DV01
  • Using DV01
    • VaR calculations
    • Risk limits
    • Hedging
    • Trade sizing
  • Convexity
    • Monetizing the convexity
    • Convexity as optionality

Workshop: Build a duration-neutral butterfly/barbell portfolio, and calculate the realized convexity

Repos and Funding

• Mechanics of repo
  • Drivers of the repo rate
  • GC and special collateral
  • Tri-party repo agreements
• Cost of carry and P&L
• Forward bond pricing and the implied repo rate
• P&L attribution – trading p&l, carry/funding, rolldown, pull-to-par

Workshop: Detailed analysis of a trading position financed on 1-week repo, analyzing the P&L and allocating P&L between ‘trading profit’ and carry/funding

Bond Futures

• Mechanics of a bond future
  • Detailed analysis of the EUREX 10yr Bund Future
  • Initial and variation margin, daily MTM
  • Rolling the position, roll P&L
• Settlement and delivery
  • The eligible deliverables into the contract
  • Conversion factors
  • Economics of delivery – the cheapest-to-deliver
  • Identifying the CTD – highest implied repo
• Basis trading
  • Gross and net basis
  • Trading the basis
• Hedging with futures
  • Calculating the Futures DV01

Workshop: Detailed analysis of Jun19 contract on Eurex, compute implied repos and identify the CTD

Corporate Bonds

• Understanding seniority and creditor claims
  • The bankruptcy process and order of priority
  • Historic default and recovery rates
• Pricing credit risk
  • Spread, recovery rate and default probability
  • The various credit spreads and how they are related
    • CDS vs. cash-market spreads
  • The role of the ratings agencies
    • Why ratings and spreads can diverge
• Corporate bond issuance
  • Investment grade and high-yield debt markets
  • Pricing risky bonds
• Credit trading
  • Spread DV01, CS01 and spread duration
    • Spread duration at the portfolio level
  • Hedging with CDS
    • Hedge default risk or CS01?
    • The CDS-cash basis, trading the basis
  • Asset swaps

Workshop: Constructing a negative-basis trade 

Interest Rate Swaps

• Mechanics of an IRS
• Intuitive pricing and risk
  • Swaps as synthetic (unfunded) bonds
  • Swaps DV01
• New issue swaps
  • Why do borrowers swap to floating?
  • The interaction between the swaps desk, DCM and syndicate/sales
  • Identifying funding ‘arbitrage’
• Asset swaps
  • Par/par vs. market-value structures
  • The significance of the ASW spread, comparison with CDS
• Duration overlay strategies
  • Portfolio hedging and ‘defeasance’ trades
• Cross-currency swaps

Workshop: Asset swaps

Structured Notes

• Callable bonds
  • Structuring a callable with swaptions
    • Terminology
    • Pricing and risk
  • The investor-driven perspective (yield enhancement)
  • Issuing unswapped callables as a hedge for mortgage convexity
• Capped FRNS, reverse floaters
  • Embedding caps to generate yield enhancement
  • Leveraging the duration – reverse floaters
    • Structuring a reverse floater

Workshop: Structuring a callable bond (a swaption calculator will be provided)