Fixed Income Investment

Fixed Income Investment provides a practical overview of the fixed income markets, with focus on the management of bond portfolios.

How you will benefit

• Increase your understanding of the different types of risk faced by bond portfolio managers
• Learn about measures of risk such as duration and convexity as well as more advanced measures
• Review fixed-income derivatives, futures, options and swaps and understand their usefulness in bond portfolio management for hedging or speculating

Content

Risk and Return for Bonds without Embedded Options

• Yield measures

• Risk measures: Part I

  • Duration: Definition, usefulness, properties and limitations

• Risk Measures: Part II

  • Convexity: Definition, usefulness, properties and limitations

• Usefulness of duration in bond portfolio management: Immunization

• Usefulness of convexity in bond portfolio management: Butterfly swaps

Risk and Return for Bonds with Embedded Options

• Adjusted yield measures

• Adjusted risk measures

  • Adjusted duration
  • Adjusted convexity

• Bond portfolio management for bonds with embedded options

New Measures of Risk

• Factor based measures of risk

  • The shift
  • The tilt
  • The flex

• Key rate durations

Use of Derivative Instruments in Bond Portfolio Management: Part I - Interest Rate Swaps

• Interest rate swaps as portfolio of bonds
• Risk of interest rate swaps: Interest rate risk and credit risk
• Swap rationale
• Advanced swaps: Forward swaps and swaptions
• Usefulness of swaps in bond portfolio management

Use of Derivative Instruments in Bond Portfolio Management: Part II - Futures

Pricing Long Term Bond Futures

• Pricing of futures: General principles
• Pricing of bond futures
  • Conversion factors
  • Cheapest bond to deliver
  • Delivery options

Use of Bond Futures in Bond Portfolio Management

• Difficulties of hedging with bond futures
• Hedging with bond futures
  • Duration hedging
  • Factor hedging
  • Price regression hedging
  • Regression / duration hedging
  • Generalized duration hedging

Strategies with Bond Futures

Use of Derivative Instruments in Bond Portfolio Management: Part III - Options

• Pricing interest rate options
  • Typology of interest rate options
  • Simple payoff diagrams
  • Pricing interest rate options: The Black, Derman and Toy Model

Use of Interest Rate Options in Bond Portfolio Management

• Pricing examples

  • Bonds with embedded options
  • Sinking funds

• Reshaping bond portfolio returns with options

• Hedging asymmetric risk with options

• Duration hedging with convexity adjustment using futures and options