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University of Hong KongUniversity of Hong Kong

Trading WorkshopTrading Workshop

David Lo

Class 6Class 6

Fixed Income Workshop IFixed Income Workshop I

Fixed Income Market BasicsFixed Income Market Basics

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Agenda

• Fixed Income Markets Basics,

• Yield Curve,

• Bond Pricing,

• At the end, you would know

• – Benchmark curves ?

• – Credit curves ?

• – Zero curves ?

• – Bond Analysis & Hedging ?

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Trade Ticket

Fixed Income Workflow

Bond Briefing

Bond Sector Browser

Market Overview

Bond Overview

Bond Overview

Terms and ConditionsBond Quotes

Bond Basics

Bond AnalysisBond Calc

User Defined Bonds

Fixed Coupon Bond Pricing

Bond OptionsBond Futures

Special Cases

Bond Watch

World Benchmark

Market Watch

Pricing Matrix

Daily Reporting

Bond Trade Monitor

Bond PortfolioBond Portfolio Analysis

Portfolio

Reporting on Multiple Positions

Bond Fundamentals

IssuerBond Credit Corporate Credit

Special Bonds Pricing

FRN AnalysisIndex Linked Analysis

ConvertibleConvertible Analysis

Decision Making

Multiple Positions

Barbell SwitchBond ComparisonBond Chart

Asset SwapBond RepoBond Returns

Single Position

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Fixed Income

• The price of a bond is the present value of its expected cash flows.

• The price is the amount the investor will pay for the future cash flows; the yield is the measure of return on those future cash flows.

• Hence price will change in the opposite direction to the change in the required yield.

• The Accrued Interest is the portion of the next coupon the seller is entitled to.

- AI = C x D / Base.

- C = Coupon Interest, D = # of days accrued, Base = # of days in coupon period.

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What news is relevant to FI people?

•  

• • All alerts AA

• • Debt technical analysis TECH/DBT

• • US corporate bond reports Debt/News1 for USC/debt news index

• • Interest rate news INT

• • Economic indicators ECI

• • New issues ISU

• • 4Cast research and commentary (3rd party) FCT

• • Government policy changes CEN

• • Debt news D

• • World bonds briefing G7/

• • Market news service (economic data releases) MNSI

• • Economic forecasts POLL-T

• • Global top business news TOP/BIZ

• • New issue commentary IIIA

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How to search a Hutchison Bond?

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Bond Analysis Model

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Bond Analysis Model

• The Bond Analysis model applies in-depth price and yield analysis for single bonds against benchmarks or other selected bonds and swap curves. It includes returns, hedging and sensitivity in real time, together with future cashflows and profit & loss, sensitivity analysis and hedging scenarios. It is integrated with displays of relevant terms and conditions and includes benchmark analysis and proceeds calculations.

• Features

• Simple total returns

• Hedging, sensitivity and returns analysis

• Simple and easy bond hedging via notional bond futures

• Single bond analytics packaged into one model

• Spreads against any benchmark or other bonds and also against swap curves

• Benefits

• Have confidence about in your analysis with the flexibility to adjust all assumptions or change input and derived values

• Obtain the Yield to Maturity of a bond from a price quote, spread to benchmark or swap rate

• Obtain the Price from the YTM quote, spread to benchmark or swap rate

• Calculate the Spread to Closest Swap, interpolated swap, benchmark and JP Morgan Corporate curve* *Not available for all currencies

• Obtain Forward Pricing of the bond

• Calculate the Asset Swap Spread from the Reuters Zero Curve or your own Zero Curve and link to the Asset Swap model for further evaluation

• Calculate the Hedge Ratio of position to a futures contract of your choice and view futures quotes, volumes, open interest and cheapest to deliver bond details if appropriate

• Graph Term Structures

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Yield Curves

• A yield curve is a representation of the term structure of yields for a given market i.e. For a set of bonds (or other instruement) with different maturities but similar characteristics.

• Yield curve are used for a number of reasons:

- Assisting pricing of new issues

- Assess relative values of bonds

- Derive implied forward rates

• Yield Curves Model

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Yield Curve Model

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Historical Yield Curves Comparison

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World Benchmark Model

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• Features and benefits

• The World Benchmarks worksheet is intended to retrieve all fixed income benchmarks for a specified country. It allows you to compare real-time curves and to monitor single-selected instruments.

• With this worksheet you can :

• Quickly locate any benchmark in the world.

• Easily find the most yielding triple-A rated benchmarks.

• Select benchmarks for a single country.

• Define seven benchmarks and compare their spreads and their returns.

•  Monitor three yield curves in real-time.

• The World Benchmarks worksheet gives you :

• A list of all the countries issuing benchmark securities.

• The easiest possible way to find the most liquid bonds in the world.

• The latest relevant news in real-time.

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Multiple Bond Analysis

• Bond Comparisons

• Barbell Switch

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Q & A

DAVID_HKU@YAHOO.COM