Duration: 3 days
 Review of Basic Financial Mathematics
 Bond Analytics  Yield and Risk
 Total Return Analysis
 Yield Curve Analysis
 Pricing Floaters
 Analysis of HighYield Bonds
 Analysis of Callable Bonds
 Principal Components Analysis
The objective of this course is to give you a good understanding of and “handson” experience with
advanced, stateoftheart toolkits for analyzing bonds and other fixed income instruments.
We start with a brief review of “basic” financial mathematics and bond analytics. We explain how
these analytics are measured at the singleposition as well as at the portfolio level.
Using a “Horizon Analysis” approach, we explain how expected return and risk can be quantified,
based upon explicit assumptions about reinvestment rates and horizon yields, including scenarios
for nonparallel shifts in the yield curve. The very powerful “Babcock formula” will be presented
to assess the uncertainties associated with the expected return.
We shall then explain in depth how zero coupon curves can be derived from observable market prices
and how such yield curves can be used to price different bond structures, including Floating Rate
Notes.
We show how an indepth analysis of floaters can be conducted, decomposing the floater into a pure
xibor part and a spread part. The difference between effective and nominal spread will be
discussed and we shall calculate the sensitivities of different floaters where the effective spread
has diverged from the nominal spread.
Next, we will discuss how “High Yield” bonds (i.e. lowrated corporate and emerging markets bonds)
can be analyzed with explicit consideration of default probabilities, recovery rates, covenants and
collaterals.
We will then look at how callable bonds and bonds with prepayment options (e.g. Mortgage Backed
Securities) can be valued using term structure models, prepayment models and Monte Carlo
Simulation. We will also show how to calculate optionadjusted keyratios such as OptionAdjusted
Yield, OptionAdjusted Spread, OptionAdjusted Duration, Static Spreads etc.
Finally, 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.
Day One
09.00  09.15 Welcome and Introduction
09.15  12.00 Review of Basic Financial Mathematics
 Time Value of Money
 Future and Present Value
 Simple and Compound Return
 Return and Yield Volatility
 Return Distributions
Bond Analytics – Yield and Risk
 Price and Yield Analysis
 Effective Maturity
 Dollar Duration and PVBP
 Modified Duration

Convexity
 How Convexity adds value to the Bond in a volatile Environment

Risk Measures for Portfolios
 Portfolio Cashflow Approach
 Approximation Approach
12.00  13.00 Lunch
13.00  16.30 Total Return Analysis (Horizon Analysis)
 Purpose of Total Return Analysis
 “Total Return” Defined
 Assessing Reinvestment Risk
 Assessing Principal Risk
 Calculating Expected Return
 Sensitivity Analysis
 Approximating the realized Return using the Babcock Formula
 Approximating the Uncertainty on the realized Return using the Babcock Formula
Day Two
09.00  09.15 Brief recap
09.15  12.00 Yield Curve Analysis
 Bootstrapping the Zero Coupon Curve from Par Swap Rates
 The Coupon Yield Curve and the Spot Curve
 Interpretations of the Yield curve
 Pricing Bonds Using the Yield Curve
 Calculating Forward Rates and Break Even Rates
Pricing Floaters
 General Features of Floaters
 Discounted Margin Model
 Nominal vs. Effective Spread

Price Sensitivity of Floaters
 Possible negative Duration

Making a Cashflow Projection for a Floater using the Zero Curve
 Accessing the Uncertainty of the Cashflow (Cashflow at Risk)
12.00  13.00 Lunch
13.00  16.30 Analysis of HighYield Bonds
 The High Yield Market

High Yield Security Valuation
 Factors Affecting the Spread
 Modelling the Yield of NonInvestment 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
Day Three
09.00  09.15 Brief recap
09.15  12.00 Analysis of Callable Bonds
 Price Yield Relationship of Callable Bonds

Priceyield diagram
 Why duration can be negative
 Why convexity can be negative
 A Generalised Model for Valuing Bonds with Embedded Options
 PrePayment Models

Binomial Interest Rate Trees

OptionAdjusted Analysis
 Option Adjusted Yield and Duration
 Option Adjusted Spread
 Yield to First Call
 Effective Duration
12.00  13.00 Lunch
13.00  16.30 Principal Component Analysis
 Common Factors Affecting Bond Returns
 Overview of MultiFactor 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
Evaluation and Termination of the Seminar