High Yield Bonds

Markets, Analysis, Investment Strategies and Risk Management

Agenda Program
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Prague, NH Hotel Prague
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Introduction to High Yield Bonds
The Anatomy of the High-Yield Market
Measures of High Yield Risks and Return
Credit Analysis of High Yield Bonds
High Yield Investment Strategies
Asset Allocation with High Yield Bonds
Controlling Risks in High Yield Portfolios
A two-day practical guide to generating income and controlling risks in the fast-growing markets for sub-investment grade bonds

Generating income is a key objective for many investors, and one that is increasingly difficult to achieve in today's low interest rate environment. Investors are therefore increasingly turning to the high yield bond markets in the search for attractive risk-adjusted returns and income.

The purpose of this two-day course is to give you a good understanding of high yield bonds and their risk-return characteristics and to provide you with a guide to investing successfully in this asset class.

We start with an introduction to high yield bonds and high yield bonds markets, giving an overview of recent market developments. We also give an overview of the different types of high yield bonds and important benchmarks.

Thereafter, we take a closer look at the historical performance and the risk-return characteristics of high yield bonds. We introduce and explain various measures of yield and risk and we show how the relative attractiveness of high yield investments can be can be assessed using break-even analysis of promised yield vs. Expected default losses under various interest rate scenarios.

We then turn to credit analysis. We give you a thorough review of fundamental and quantitative methods for assessing the quality and credit risk of high yield bonds. We illustrate with practical, real-life examples. We also explain the rating agencies approaches to assessing the credit quality of corporate bond issues and we demonstrate how the credit risk can be quantified using "internal" models.

Further, we present and explain different ways of investing in high yield bonds. We focus in particular on the opportunities currently offered in higher-quality, short duration high-yield bonds. We explain and demonstrate why these bonds have the potential to generate attractive risk-adjusted returns and income, with less interest rate sensitivity versus investment-grade alternatives. We also explain how the observed tendency for bond ratings to "mean revert" can be exploited through stable allocations strategies.

We demonstrate how HY bonds can be fitted into a broad asset allocation strategy to improve portfolio efficiency, and we explain and illustrate how the risks of the portfolio can be controlled using credit derivatives and other instruments.

We conclude with an outlook for the high yield markets. We present a number of macroeconomic scenarios and discuss their possible consequences for high yield investments.

Program of the seminar: High Yield Bonds

The seminar timetable follows Central European Time (CET).

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to the High Yield Bond Markets

  • What Is a High Yield Bond?
  • Market Structure and Types of HY Bonds
  • Market History and Recent Developments
  • The New Issues vs. the Secondary Markets
  • Important High Yield Benchmarks

The Anatomy of High Yield Bond Markets

  • Historical Returns and Volatility
  • Correlation of Returns with other Asset Classes
  • Macroeconomic Developments and High Yield Performance
  • A Closer Look at Risk and Return Characteristics of HY Bonds
    • Yield to Maturity, Yield to Call, Yield to Worst and Effective Yield
    • Duration and convexity of HY bonds
    • Measures of default rates and losses
    • New issue bias in default rate calculations
    • The mortality/aging approach
  • Breakeven Analysis: Promised Yield vs. Expected Default Losses
  • Examples and Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Credit Analysis of High Yield Bonds

  • The Components of Corporate Credit Risk
    • Default risk
    • General and specific credit spread risk
  • Fundamental Credit Analysis
    • Fundamental business analysis
    • Financial characteristics and policy
    • Coverage ratios
    • Cash flows and debt servicing capacity
  • Importance of High Yield Bonds’ Legal Characteristics
    • Subordination
    • Covenants
  • Analysis of Credit Enhancements
  • External High Yield Ratings and their Interpretations
  • Internal Credit Modelling of HY Bonds
    • Modelling PD, LGD and EAD
    • Bankruptcies, work-ours and recoveries
    • Risk-adjusted pricing of HY bonds
  • Examples and Small Exercise

09.00 - 09.15 Recap

09.15 - 12.00 Investing in High Yield Bonds

  • The Case for Investing in High Yield Bonds
    • Income generation/Yield enhancement
    • Portfolio diversification
    • Sheltering against rising interest rates.
  • Ways of Investing in HY Bonds
    • Cash bonds
    • Open-ended and closed-ended HY funds
    • HY exchange traded funds (ETFs)
    • Synthetic investments with single-name and index credit default swaps
    • Credit-linked notes
  • Investing Strategies for Low and Rising Interest Rate Environments
    • Short duration high yield strategies
    • Choosing HY Bonds with resilient credit risk profiles
    • Short duration HY as a complement to leveraged loans
  • A Rating Transition Framework for a High Yield Bond Strategy
    • Exploiting “mean reversion” of credit ratings through stable allocation strategies
  • Examples and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 High-Yield Bond Portfolio Management

  • Fitting HY Bonds into an Asset Allocation Strategy
    • Protecting the investment portfolio against inflation and rising rates
    • Improving the efficient frontier with HY bonds
    • Constructing an optimal portfolio under a risk budget constraint
  • Controlling the Risks of a HY Bond Portfolio
    • Quantifying portfolio credit risk
    • Identifying and managing concentration risks
    • Managing credit migration and spread risk
    • Using credit derivatives to manage credit portfolio risk
    • Measuring and managing macro-level correlation (“beta”) risk
    • Measuring and managing market risk
    • Measuring and managing liquidity risks

Outlook for the High Yield Bond Markets

  • Four Scenarios for Growth, Inflation and Interest Rates
  • Possible Effects of tougher Banking Regulation on HY Markets

Summary, Evaluation and Termination of the Seminar

Training catalogue in PDF
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