The purpose
of this highly practical seminar is to give you a good understanding of the
mathematical methods used in fixed income analysis and bond trading.
We start with general introduction to financial mathematics and its uses in the
bond markets. We then give a thorough review of the basic building blocks in
fixed income mathematics, including all-important concepts such as
time value of money, compounded interest, annuities, and discount factors. We present the formulas
for these analytics and give
examples of their calculation under various
conventions. We then explain the uses of the basic formulas in the
risk-return analysis of bonds and other fixed income structures.
Next, we describe
how different yield measures are calculated and interpreted,
illustrated by a number of practical examples. We take a closer look at the
risk analytics such as duration, modified duration, dollar
duration and convexity. We also show how to calculate portfolio key
ratios for interest rate sensitivity. Further, using Total Return
Analysis, we demonstrate how you can project returns on fixed
income investments under various assumptions and how you can use
scenario analysis to obtain estimates of return
distributions for assessing the trade-off between return and risk on
single-instrument and portfolio investments.
We then
give a thorough introduction to the "yield curve" as an analysis
tool. We explain how the spot curve is derived from market data and
we demonstrate how this curve can used for pricing and risk analysis
of fixed income instruments. We also explain how forward rates can be derived
from the curve and used for the projection of reinvestment rates and for
break-even investment analysis.
Further, we
demonstrate how bond positions and portfolios can be financed using repos,
and we thoroughly explain the mechanics and key
concepts related to theses important financing tool. Finally, we explain the
"term structure of volatility" and discuss the importance of
"mean reversion" and other volatility features
in fixed income analysis.
