October 5, 2007

Introduction to Fixed Income

 

Objectives:

By the end of this session the course participants will be able to:

  • Understand how the fixed income markets operate
  • Understand the features and characteristics of fixed income securities
  • Price a bond
  • Develop understanding of fixed income market participants
  • Identify the risks associated with these instruments

Session 1: Overview of Fixed Income Markets

The opening session introduces the basics of debt. Explore the different categories of debt and identify the major market participants. Examine the differences between debt and equity. By the end of this session the course participants will be able to:

  • Define debt
  • Conceptually picture the size of the market
  • Outline broad structure of debt markets
  • Differentiate between
    • Debt and equity
    • Bonds and money market instruments
  • Identify the market participants (differentiate between the buy and sell sides)
    • Issuers
    • Investors
      • Asset managers
      • Money Mangers
      • Insurance companies
      • Institutional clients
    • Custodians

 

Session 2: Bond Fundamentals

Describe the terms associated with a fixed income instrument. By the end of this session the course participants will be able to:

  • Define the following terms:
    • Par Value
    • Maturity and term to maturity
    • Coupon
    • Yield to maturity
  • Calculate the settlement amount of a trade
  • Read bond quotes and identify terms of an individual security

Session 3: The US Government Market

Review the US government market and discuss how the US government brings a new issue to market. By the end of this session the course participants will be able to:

  • Identify the types of issues
    • Bills, notes and bonds
    • Primary versus secondary market
  • Understand how the treasury auction operates:
    • The bidding process
      • Competitive vs. non competitive bids

Session 4: Pricing Bonds

Examine the pricing of bonds by first reviewing the concepts of time value of money. Show how a bond is priced in the market using market conventions. Explore market convention by reviewing Bloomberg screens. By the end of this session the course participants will be able to:

  • Calculate present and future value
  • Understand compounding
  • Understand quoting conventions
    • Treasuries plus a spread
  • Differentiate between bond yields and money market yields
  • Identify and discount cash flows
  • Price a note/bond
  • Calculate accrued interest
    • Different day count conventions
  • Define a basis point

Session 5: Fixed Income Instruments

Examine the different categories of fixed income instruments. Define each instrument and the major applications for each category. By the end of this session the course participants will be able to:

  • Identify the following securities:
    • Government vs. Corporate
      • Domestic, foreign, international and global bonds
    • Discuss how new issues are bought to market
    • Agency issues
    • Floating Rate notes
    • Callable/Puttable bonds
    • Zero Coupons
    • Preferred stock
    • Convertibles
    • Foreign exchange
    • Bank loans

 

Session 6: Introduction to Securitization

Securitized products are grouped into three product groups: Asset Backed Securities (ABS), Mortgage Backed Securities (MBS) and Collateralized Debt Obligations (CDOs). By the end of this session the course participant will be able to:

  • Define these instruments
  • Explain the main structures of these instruments
  • Explain the features, characteristics and different terminologies including:
    • Asset Backed Securities
      • Amortizing loans
      • Revolving credit
    • Mortgage backed securities
      • TBAs
      • Pass-throughs
      • Pools
      • Collateralized Mortgage Obligations (CMOs)
      • IOs and POs
    • Collateralized Debt Obligations (CDOs)
      • CBOS
      • CLOs

Session 7: Evaluate the Different Risks

Explore the different risks associated with fixed income instruments. Examine the role that the credit agencies play in the financial markets. (High level overview)

  • Interest rate/Market Risk
  • Credit/Default Risk
    • Rating Agencies
  • Prepayment
  • Liquidity
  • Currency/Exchange risk
  • Sector Risk
  • Country
  • Corporate Actions

Session 8: Introduction to Risk Measurements and Portfolio Mgt.

Briefly discuss the concept of duration, DV01 and convexity. In addition, this session will explore how a portfolio will be viewed in terms of underweighting sectors, duration and credit risk. By the end of the session the course participant will be able to:

  • Define duration, DV01 and convexity
  • Conceptually understand how they are applied