Gfedu slides fixed income

www.gfedu.net Fixed income analysis 2017年CFA二级培训项目 讲师：梁震宇 1-174 www.gfedu.net 梁震宇  工作职称：金程教育资深培训师  教育背景：经济学硕士、航海专业学士、CFA（注册金融分析师）、FRM （金融风险管理师）、CATTI（中国人事部认证口译）持证人、锦翼FIRE背 词法创始人、中国翻译家协会成员  工作背景：曾任八年大学金融专业、口译专业教师；曾任Jefferies项目分析 师；曾在新东方、新世界等多家顶级培训机构担任讲师；200余场国际会议 专业口译；多次担任企业咨询项目负责人。学术功底扎实，具有清晰的表达 能力、强烈的个人魅力和远见卓识。对课程把握度强，能够关注到不同背景 的学员的进度。上课条理清晰，深入浅出，善亍将书面理论结合实际操作， 温文尔雅的授课形式如行于流水般流畅，深受学员的爱戴。  服务客户：中国工商银行、中国银行、中国建设银行、中国农业银行、招商 银行、三菱银行、杭州银行、中国进出口银行、上海银行、兴业银行、中国 人民银行研究生部、兴业证券、平安证券、南京证券、湘财证券、上海证券 交易所、深圳综合开发研究院、山东省银行同业协会 2-174 www.gfedu.net Topic Weightings in CFA Level II Content Session NO Weightings Study Session 1-2 Ethics & Professional Standards 10-15 Study Session Quantitative Methods 5-10 Study Session Economic Analysis 5-10 Study Session 5-6 Financial Statement Analysis 15-20 Study Session 7-8 Corporate Finance 5-15 Study Session 9-11 Equity Analysis 15-25 Study Session 12-13 Fixed Income Analysis 10-20 Study Session 14 Derivative Investments 5-15 Study Session 15 Alternative Investments 5-10 Study Session 16-17 Portfolio Management 5-10 3-174 www.gfedu.net  SS12: Valuation Concepts Framework • R35 Term Structure and Interest Rates Dynamics Fixed Income Analysis • R36 The arbitrage-free valuation framework  SS13: Topics in Fixed Income Analysis • R37 Valuation and analysis: Bonds with Embedded Options • R38 Credit Analysis Models • R39 Credit Default Swaps 4-174 www.gfedu.net Reading 35 Term Structure and Interest Rates Dynamics 5-174 www.gfedu.net Framework Benchmark curve • Spot curve • Forward curve • Par curve • YTM, spot rate and return on bond • The swap rate curve Spread • The swap spread • I-spread • Z-spread • TED spread • LIBOR-OIS spread 6-174 www.gfedu.net Framework Traditional theories of the term structure of interest rates • Local expectation theory • Liquidity preference theory • Preferred habitat theory • Segmented markets theory Modern term structure models • Equilibrium term structure models • Arbitrage-free model Yield curve factor models • level、steepness、curvature • Interest rate volatility • Managing yield curve risk: duration & key rate duration 7-174 www.gfedu.net Spot Rates & Forward Rates  A spot interest rate (spot rate) is a rate of interest on a security that makes a single payment at a future point in time P(T )  1  r (T ) T  Discount factor: the discount factor, P(T)  Spot yield curve (spot curve): the spot rate, r(T), for a range of maturities in years T >  The annualized return on an option-free and default-risk-free zerocoupon bond (zero for short) with a single payment of principal at maturity  The shape and level of the spot yield curve are dynamic  The yield to maturity(YTM) or the yield of a zero-coupon bond with maturity T is the spot interest rate for a maturity of T 8-174 www.gfedu.net Spot Rates & Forward Rates  A Forward rate is an interest rate that is determined today for a loan that will be initiated in a future time period  reinvestment rate that would make an investor indifferent between buying an eight-year zero-coupon bond or investing in a seven-year zero-coupon bond and at maturity reinvesting the proceeds for one year In this sense, the forward rate can be viewed as a type of breakeven interest rate  one-year rate that can be locked in today by buying an eight-year zero- coupon bond rather than investing in a seven-year zero-coupon bond and, when it matures, reinvesting the proceeds in a zero-coupon instrument that matures in one year In this sense, the forward rate can be viewed as a rate that can be locked in by extending maturity by one year 9-174 www.gfedu.net Spot Rates & Forward Rates  Forward curve :The term structure of forward rates for a loan made on a specific initiation date F(T*,T ) = T é1+ f (T*,T )ù ë û F(T*,T ) = the forward price of a $1 par zero-coupon bond maturing at time T *+T delivered at time T * F(T*,T ) = the discount factor associated with the forward rate  Forward rates model (the relationship between spot rate and forward rate)： 1  r (T * T ) (T *T )  1  r (T *) T* 1  f (T *, T ) 10-174 T www.gfedu.net Structure and features of credit default swaps  Credit default swaps (CDS) is essentially an insurance contract for the reference, the reference obligation is the fixed income security on which the swap is written-usually a bond but potentially also a loan  Protection buyer receives a payment from the protection seller if default occurs on the reference entity  The protection buyer pays the seller a premium that is either paid upfront or over a period of time The default swap premium is also referred to as the CDS spread  Standardization in the market has led to a fixed coupon on CDS  The difference between the standardized coupon rate and the credit spread is paid upfront by one of the parties to the contract 160-174 www.gfedu.net Structure and features of credit default swaps  Single-Name CDS: the reference obligation is the fixed-income security on which the swap is written, usually a senior unsecured obligation ( in the case of a senior CDS)  The issuer of the reference obligation is called the reference entity  The payment of CDS is made not only when the reference entity defaults on the reference obligation but also when it defaults on any other issue that is ranked pari passu or higher  The payoff is based on the market value of the cheapest-to-deliver bond that has the same seniority as the reference obligation  Index CDS: covers multiple issuers The protection for each issuer is equal and the total notional principal is the sum of the protection on all the issuers  The higher he correlation of default among index constituents, the higher the spread 161-174 www.gfedu.net Example: Cheapest-to-deliver  Party X is a protection buyer in a $10 million national principal senior CDS of A lnc There is a credit event (i.e., Alpha defaults) and the market prices of Alpha’s bonds after the credit event are as follows:  Bond P, a subordinated unsecured debenture, trading at 15% of par  Bond Q, a five-year senior unsecured debenture, trading at 25% par  Bond R, a three-year senior unsecured debenture, trading at 30% par  What will be the payoff on the CDS?  Answer:  The cheapest-to-deliver senior unsecured debenture (i.e., same seniority as the senior CDS) is bond Q the payoff will be the difference between the notional principal and market value of the CTD  Payoff = $10 million – (0.25)($10 million) = $7.5 million 162-174 www.gfedu.net Example: index CDS  Example:  Party X is a protection buyer in a five-year, $100 million notional principal CDS for CDX-IG, which contains 125 entities One of the index constituents, company A, defaults and its bonds trade at 30% of par after defaults  What will be the payoff on the CDS?  What will be the notional principal of the CDS after defaults?  Answer:  The notional principal attributable to entity A is $100 million/125 = $0.8 million Party X should receive payment of $0.8 million – (0.3) (0.8) = $560,000  Post the default event, the remainder of the CDS continues with a notional principal of $99.2 million 163-174 www.gfedu.net Structure and features of credit default swaps  Common types of credit events  Bankruptcy: the protection filing allows the defaulting party to work with creditors under the supervision of the court so as to avoid full liquidation  Failure to pay: occurs when the issuer misses a scheduled coupon or principal payment without filing for formal bankruptcy  Restructuring: occurs when the issuer forces its creditors to accept terms that are different than those specified in the original issue 164-174 www.gfedu.net Structure and features of credit default swaps  When there is a credit event, the swap will settle in cash or physical delivery  Physical settlement on CDS after a Credit Event Swap seller reference obligation (bond or loan) par value Swap buyer  Cash settlement on CDS after a Credit Event Swap seller par value－market value  In cash settlement:  Payout amount =payout ratio * notional principal  Payout ratio = 1- recovery rate (%) 165-174 Swap buyer www.gfedu.net Market price of CDS  Factors that influence the pricing of CDS ( i.e CDS spread):  Probability of default: likelihood of default by the reference entity in a given year  Loss given default: the expected amounts of loss in the event that a default occurs, which is inversely related to the recovery rate  Coupon rate on the swap  Hazard rate: the probability of default given that default has not already occurred  The CDS spread is higher for a higher probability of default and for a higher loss given default （expected loss） t =(hazard rate) t * (loss given default) t 166-174 www.gfedu.net Example: Hazard rate  Example: Hazard rate  Consider a five-year senior CDS on Xeon Corp Xeon’s hazard rate is 2% and increases by 1% per year Compute the survival rate in five years  Answer:  The hazard rates for the five years are: 2%, 3% 4%, 5%, and 6%  Survival rate in five years = (1-0.02)(1-0.03)(1-0.04)(1-0.05)(10.06) = 0.815 or 81.5% 167-174 www.gfedu.net Market price of CDS  Premium leg: the payments made by the protection buyer to the seller  Protection leg: the contingent payments the protection seller must make a payment to the protection buyer in case of a default  Upfront premium on a CDS  Upfount payment (paid by protection buyer)=PV(Protection leg)PV(Premium leg) Or approximately:  Upfount premium % (paid by protection buyer) ≈ (CDS spread – CDS coupon) * duration  CDS price can be quoted as:  Price of CDS (per $100 notional) ≈ $100-upfront premium (%) 168-174 www.gfedu.net Example: upfront premium and price of CDS  Aki Mutaro, bond portfolio manager for a regional bank, is considering buying protection on one of the bank’s high-yield holdings: Alpha Inc bonds Ten-year CDS on Alpha bonds have a coupon rate of 5% while the 10-year Alpha CDS spread is 3.5% the duration of the CDS is  Calculate the approximate upfront premium and price of a 10-year Alpha Inc., CDS  Answer:  Upfront premium % ≈ (CDS spread – CDS coupon) × duration = (3.5% - 5.0%) × = -10.5%  Hence, the protection seller would pay (approximately) 10.5% of the notional to the protection buyer upfront because the CDS coupon is higher than the credit spread  CDS price = 100 – (-10.5) = $110.50 per $100 notional 169-174 www.gfedu.net Market price of CDS  At inception 0f a CDS, the CDS spread（and the upfront premium）is computed based on the credit quality of the reference entity  After inception, the credit quality of the reference entity( or the credit risk premium in the overall market ) may change  Profit for protection buyer ≈ change in spread * duration * notional principal  Profit for protection buyer (%) ≈ change in spread (%)*duration  The protection buyer is short credit risk and hence benefit when credit spreads widen  Termination of CDS prior to expiration or default: enter into an offsetting transaction  i.e a protection seller can buy protection with the same terms as the original CDS and maturity equal to the remaining maturity to remove his exposure  The process of capturing value from an in-the-money(out-of -money)CDS exposure is called monetizing the gain (or loss) 170-174 www.gfedu.net Use of CDS - manage credit exposures  Credit curve: the relationship between credit spreads for different bonds issued by an entity and the bond’s maturities  The credit curve will be upward sloping, if the longer maturity bonds have a higher credit spread compared to shorter maturity bonds  The credit curve will be flat, if the hazard rate is constant  In a naked CDS, and investor with no exposure to the underlying purchases protection in the CDS market  In a long/short trade, an investor purchase protection on one reference entity while selling protection on another reference entity 171-174 www.gfedu.net Use of CDS - manage credit exposures  A curve trade is a type of long/short trade where the investor is buying and selling protection on the same reference entity but with different maturities  An investor who believes the short-term outlook for the reference entity is better than long-term outlook can use a curve-steepening trade (buying protection in a long-term CDS and selling protection in a shortterm CDS)  An investor who is bearish about the reference entity’s prospects in the short term will enter into a curve- flattening trade 172-174 www.gfedu.net Use of CDS- earn arbitrage profits  Basis trade: an attempt to exploit the difference in credit spreads between bond markets and the CDS market  Rely on the idea that such mispricing will be temporary and that disparity should eventually disappear after it is recognized  Another transaction: buy and sell debt instruments issued by the same entity based which instruments the CDS market suggests to be undervalued or overvalued  Collateralized debt obligations(CDO): are claims against a portfolio of debt securities  Synthetic CDO: has similar credit risk exposure to that of a cash CDO but is assembled using CDS rather than debt securities’  If it is created at a cost lower than that of the equivalent cash CDO, investor can buy the synthetic CDO and sell the cash CDO, producing a profitable arbitrage 173-174 www.gfedu.net It’s not the end but just beginning This moment will nap, you will have a dream; But this moment study, you will interpret a dream 现在睡觉的话会做梦，而现在学习的话会让梦实现。 174-174 ... Framework • R35 Term Structure and Interest Rates Dynamics Fixed Income Analysis • R36 The arbitrage-free valuation framework  SS13: Topics in Fixed Income Analysis • R37 Valuation and analysis: Bonds... Session 12-13 Fixed Income Analysis 10-20 Study Session 14 Derivative Investments 5-15 Study Session 15 Alternative Investments 5-10 Study Session 16-17 Portfolio Management 5-10 3-174 www .gfedu. net... Credit Analysis Models • R39 Credit Default Swaps 4-174 www .gfedu. net Reading 35 Term Structure and Interest Rates Dynamics 5-174 www .gfedu. net Framework Benchmark curve • Spot curve • Forward