Fixed Income Mathematics: Pricing and Valuation of Bonds
Explore and analyze the mathematics of bond prices and yields, as well as a variety of quantitative analytical methodologies.
- » Portfolio managers, institutional sales staff, research analysts, and financial analysts
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- » Fixed Income Markets I or equivalent knowledge
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- » Pricing and valuation of bonds based on historical and technical valuation
- » Calculate and interpret price, yield and accrued interest
- » Discuss yield to maturity as an expression of current value versus expected return
- » Identify by security appropriate interest compounding and day count conventions
- » Describe the various types of duration (Macualey's, modified, dollar, effective), as well as their application in quantifying and managing interest rate risk
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- MODULE 1: INTEREST RATES AND PRICING CONVENTIONS
- What is an interest rate: definitions
- Interest conventions: simple and compound interest
- MODULE 2: FINANCIAL MATHEMATICS
- Time value of money
- Bond math basics
- Accrued interest
- MODULE 3: CONVENTIONAL YIELD MEASURES
- Nominal yield
- Current yield
- Yield to maturity
- Yield to call
- Conventions for yield quotes
- MODULE 4: EXPECTED RISKS VERSUS EXPECTED RETURNS
- Sources of return
- Risks of fixed income securities
- MODULE 5: YIELD TO MATURITY RECONSIDERED
- As alternative expression of price
- Why YTM is a poor proxy for future returns
- MODULE 6: ESTIMATING RETURNS
- Realized compound yield
- Total return (horizon) analysis
- MODULE 7: TYPES OF YIELD CURVES
- Security type
- MODULE 8: INTEREST RATE LEVELS AND SHAPE OF THE YIELD CURVE
- Nominal interest rates (yields to maturity)
- Related Considerations
- Yield curve theories
- MODULE 9: FACTORS DETERMINING VOLATILITY
- Non callable bonds
- Callable bonds
- MODULE 10: MACAULEY'S DURATION
- Developed as a measure of a bond's life
- Immunizing portfolios
- MODULE 11:QUANTIFYING PRICE SENSITIVITY TO CHANGES IN MARKET YIELDS
- Modified duration
- Dollar duration
- Impact of convexit
- MODULE 12: BOND PRICE VOLATILITY PART 2
- Curvature of the price/yield function
- Rate of change of duration
- Second derivative of the price/yield function
- MODULE 13: CALLABLE BONDS
- Effective duration
- Negative convexity
- MODULE 14: OTHER USES OF DURATION AND CONVEXITY
- Portfolio applications
- Bond swap
- MODULE 15: NATURE OF FUTURES CONTRACTS
- What is a futures contract?
- Role of the clearinghouse in futures trading
- Forward contracts versus futures
- MODULE 16: CHARACTERISTICS OF FUTURES CONTRACTS
- Standardized contract specifications
- Daily settlement
- MODULE 17: FIXED INCOME FUTURES CONTRACTS
- T-bond and T-note futures
- Eurodollar and t-bill futures
- MODULE 18: FINANCIAL FUTURES/FORWARD CONTRACTS PRICING RELATIONSHIPS
- Cost of carry (carrying charges)
- Cost of carry (arbitrage) pricing
- Cash and carry trade example
- Yield curve shape versus cash/futures relationship
- Expectations in the pricing of futures/forwards
- MODULE 19: HEDGING WITH FUTURES CONTRACTS
- Hedging considerations
- Hedging example
- MODULE 20: INTRODUCTION TO MORTGAGE BACKED SECURITIES
- Mortgage loans
- MODULE 21:MORTGAGE PASS THROUGH SECURITIES
- Types of mortgage pass through securities
- Characteristics of pass throughs
- Prepayment of principal (prepayment risk)
- Mortgage pool characteristics
- Mortgage pool prepayment considerations
- Quantifying prepayment speed
- Analysis of pass through securities
- MODULE 22: COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
- CMO basics
- One sided PACs
- Floating rate CMO structures
- Stripped mortgage backed securities
- MODULE 23:ANALYTIC TOOLS FOR MBS
- Total return analysis
- Option valuation of pass through securities
- Estimating price volatility
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