The objective of this course is to give you a good understanding of and "hands-on" experience with advanced, state-of-the-art 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 single-position 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 non-parallel 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 in-depth analysis of floaters can be conducted, decomposing the floater into a pure x-ibor 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. low-rated 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 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.
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.