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Instructor: Stephen A. Berkowitz
Hours: 9:00 am - 4:30 pm each day; Registration/Breakfast begins at 8:30 am

 Day 1 Bond Fundamentals and Economic Risk

v     Securities are contracts with different claims to issuer expected cash flows and/or assets. The value of specific bonds depends, in part, on:

·        The seniority of claims (General Motors);

·        The timing and magnitude of cash flows (coupon
and zero coupon bonds);

·        The joint probability that the issuer will honor contract terms on time and in full.

 Exercise: Automobile Company Bonds
 

v     Economic risks also affect the value, and consequently, the price of bonds including:

·        Probability of default;

·        Relationship of bond interest rate to prevailing interest rates for benchmark risks;

·        Anticipated inflation;

·        Supply and demand characteristics affecting the premium or discount investors require to enter into bond trades;

·        Expected interest and principle repayment.

 Exercise:  Which bond is more likely to default?
 

v     Bond math basics and related conventions

·        Interest rates;

·        Yields and rates of return;

·        Fixed income pricing conventions;

·        Conventional yield measures;

·        Yield to maturity assumptions;

·        Yield curves and related graphic expressions of bond characteristics;

·        Variable rate bonds.

 Exercise: What are bonds worth given periodic Congressional Budget
 Office scenarios and other economic scenarios?
 

v     Issuers of fixed income securities

·        Government securities

¨       Treasury bills;

¨       Notes;

¨       Bonds;

¨      Treasury Inflation Protected Securities (TIPS,
I bonds);

¨      Strips;

¨      Agency securities.

·        Mortgage backed securities

¨      Pass-throughs;

¨      CMOs;

¨      Other mortgage backed securities and funds.

·        Other types of asset backed securities: credit card receivables, auto loans, corporate receivables, etc.

·        State and local securities

¨      General obligation;

¨      Revenue bonds.

·        Corporate bonds

¨      Bondholder entitlements;

¨      Hierarchy of claims in the event of default;

¨      Remedies in the event of default.

·        Preferred stocks and other hybrid bonds with
equity characteristics.

·        High yield securities (equities in disguise).

v     Introduction to relevant documents available from bond issuers and other sources

·        Indenture(s);

·        Prospectus/offering statement;

·        Treasury yield curve;

·        Bond rating agencies and bond ratings.

 Exercise:  What economic forces have greatest impact on the price and
 ultimate value of specific classes of bonds?

 

Day 2 Bond Valuation and Bond Markets

 

v     Bonds are subject to economic risks

·        Anticipated time value of money and the impact of maturity on bond value;

·        Interest rate and yield fluctuations due to anticipated inflation and  anticipated changes in currency exchange rates;

·        Interest rate and yield fluctuations due to anticipated economic growth;

·        Defaults that can affect the timing, amounts, or nature of contractual payments.

 

 Exercise:  Estimate the impact of anticipated changes in the U.S.
 economy on long term and short term bonds. 

 

v     The bond markets: a survey of broad market trends – bond issuers, the relative value of bonds outstanding and recent
market activity in the significant U.S. and overseas bond markets

·        Current trends in the structural characteristics of bonds;

·        Tax advantaged securities:

¨      Sovereign government bonds;

¨      Agency, state and local bonds.

·        Special purpose bonds e.g.; hospital bonds, highway bonds – issues related to “intergenerational” cost sharing among classes of asset beneficiaries;

·        Corporate bond issuers.

v     Bond market benchmarks, their strengths and weaknesses

·        Major global fixed income markets;

·        Treasury securities;

·        Index providers;

·        The current and potential role of ETF’s and increasing penetration into the index offerings of more detailed subsets of the financial markets.

 

 Exercise:  Select the most appropriate benchmark for specific bonds.

 

v     Bond documents

·         Offering statement (public sector);

·         Prospectus (corporate bonds);

·         Covenants.

v     Open market desk of the New York Federal Reserve Bank

·        Role of primary bond dealers who trade in U.S. Government securities with the Federal Reserve Bank of New York;

·        Impact on Monetary Policy;

·        Role of monetary policy in recent financial crises.

v     Bond trading – notions of asymetric information

·        Most bonds are not listed on markets where “real time” prices are published;

·        Extent broker dealer quotes substitute for current or contemporaneous market prices;

·        Impact of dealer quotes on yields and volatility
and liquidity -  subtitled “What price liquidity?”;

·        Measuring liquidity: bid/ask spread, trading
volume, size and frequency, price volatility,
spreads from treasuries.

 

 Exercise:  What bonds have lowest “transactions costs?”

 

v     Grouping bonds by financial characteristics to produce valid comparisons

·        Rating agency evaluations of bond risk;

·        Impact of “the current crisis of faith” on expected riskiness of bonds and expected bond yields;

·        Influence of rating agencies on bond offerings, structure and trading yields.

v     Role of fixed income investments in pension and other special purpose funds

·        Diversification;

·        Cash flow for benefits, prepayments, dedication or reinvestment;

·        Partial or full duration matching strategies;

·        Risk constraints.

 

 Exercise:  What bond investments would appeal to a fully funded
 pension plan?  To underfunded pension plans? To discretionary
 treasury funds?  Why?

 

v     Credit enhancements and bond insurance

·        Claims to specific assets;

·        Bond insurers and insurance.

v     Expectations for the near term and the next 12 months – Do we have consensus?

·        Anticipated U.S. Treasury rates;

·        Corporate yields;

·        Utility yields;

·        State and local tax advantaged yields.