VII. ANALYSIS OF DEBT INVESTMENTS
К оглавлению1 2 3 4 5 6 7 8 9 10 11A. Debt Securities
1. Features of debt securities
a. Indenture and covenants
b. Maturity
c. Par value
d. Coupon rate
(1) Zero-coupon bonds
(2) Step-up notes
(3) Deferred coupon bonds
(4) Floating-rate securities
(5) Accrued interest
e. Conversion privilege
f. Put provision
g. Currency denomination
h. Embedded options
i. Borrowing funds to purchase bonds
(1) Margin buying
(2) Repurchase agreement (repos)
2. Provisions for paying off bonds
a. Call and refunding provision
(1) Call schedule
(2) Noncallable versus nonrefundable bonds
(3) Regular versus special redemption prices
b. Prepayments
c. Sinking fund provisions
d. Index amortizing notes
3. Debt market structure
a. Types of markets (e.g., direct search or private placement markets, brokered
markets, dealer markets, auction markets)
b. Electronic trading systems
B. Risks Associated with Investing in Bonds
1. Interest rate risk
a. Price/yield relationship
b. Impact of bond features on interest rate risk (e.g., maturity, coupon rate,
embedded options)
c. The impact of the yield level
d. Interest rate risk for floating-rate securities
e. Measuring interest rate risk (e.g., approximating percentage price change,
approximating dollar price change)
2. Yield curve risk
3. Call and prepayment risk
4. Reinvestment risk
5. Credit risk
a. Default risk
b. Credit spread risk
c. Downgrade risk
6. Liquidity risk
a. Liquidity risk and marking positions to market
b. Changes in liquidity risk
7. Exchange rate or currency risk
8. Inflation or purchasing power risk
9. Volatility risk
10. Event risk
a. Natural catastrophes
b. Corporate takeover / restructurings
c. Regulatory risk
d. Political risk
C. Global Bond Sectors and Instruments
1. U.S. Treasuries and other government securities
a. Types of Treasury securities (e.g., bills, notes, bonds, inflation protection
securities)
b. The Treasury auction process
c. The secondary market (e.g., on-the-run issues, off-the-run issues, role of
government securities dealers)
d. Pricing conventions
e. Treasury strips
(1) Coupon strips
(2) Principal strips
f. Federal agency securities
(1) Agency debentures
(2) Agency mortgage-backed securities
(a) Mortgage passthrough securities
(b) Collateralized mortgage obligations
2. Municipal securities (including European)
a. Tax-backed debt (e.g., general obligation debt, appropriation-backed obligation)
b. Revenue bonds
c. Special bond structures (e.g., insured bonds, prerefunded bonds)
3. Corporate debt instruments
a. Bankruptcy and bondholder rights
b. Factors considered in assigning a credit rating
c. Corporate bonds
d. Medium-term notes
e. Commercial paper
f. Bankers’ acceptances
g. Certificates of deposit
4. Asset-backed and mortgage-backed securities
a. The role of the special purpose vehicle
b. Credit enhancement mechanisms
5. International bonds
a. Global bonds
b. Sovereign debt
c. Emerging market bonds
D. Yield Spreads
1. The role of the central bank in influencing interest rates
a. Policy tools
b. Interest rates over the business cycle
c. Inflation and interest rates
2. The Treasury yield curve
3. Measuring yield spreads (e.g., absolute yield spread, relative yield spread)
a. Intermarket sector spreads and intramarket spreads
b. Credit spreads
c. Effect of embedded options
4. Effect of issue size/liquidity on spreads
E. Introduction to the Valuation of Debt Securities
1. General principles of valuation
a. Estimating cash flows
b. Determining the appropriate rate or rates
c. Discounting the expected cash flows
d. Valuation using multiple discount rates
e. Valuing semiannual cash flows
f. Valuing a zero-coupon bond
g. Valuing a bond between coupon payments
(1) Computing the full price
(2) Computing the accrued interest and the clean price
(3) Day count conventions
2. The arbitrage-free valuation approach (e.g., using treasury spot rates, credit spreads)
F. Yield Measures, Spot Rates, and Forward Rates
1. Sources of return
a. Coupon interest payments
b. Capital gain or loss
c. Reinvestment income
2. Traditional yield measures
a. Current yield
b. Yield to maturity (including bond equivalent yield convention)
c. Yield to call
d. Yield to put
e. Yield to worst
f. Cash flow yield
g. Yield spread measures for floating-rate securities
h. Yield on Treasury bills
3. Theoretical spot rates
a. Bootstrapping approach for constructing the theoretical spot rate curve for
treasuries
b. Yield spread measures relative to a spot rate curve
4. Forward rates
a. Deriving 6-month (i.e., 1-period) forward rates
b. Relationship between spot rates and short-term forward rates
c. Valuation using forward rates
d. Computing any forward rate
G. Measurement of Interest Rate Risk
1. The full valuation approach
a. Scenario analysis
b. Stress testing
c. Total return assumptions
d. Interpreting the results
2. Price volatility characteristics of bonds
a. Price volatility characteristics of option-free bonds (including price/yield
convexity)
b. Price volatility characteristics of bond with embedded options (e.g., call/prepay,
put)
3. Duration
a. Defining duration
b. Calculating duration
c. Approximating the percentage price change using duration
d. Size of rate changes and duration estimate
e. Modified duration versus effective duration
f. Macaulay duration and modified duration
g. Interpretations of duration (e.g., as first derivative, as some measure of time)
h. Duration of a floating-rate note (including inverse floaters)
i. Portfolio duration (including leverage, derivatives)
j. Spread duration for fixed-rate bonds
4. Convexity
a. Convexity measure
b. Convexity adjustment to percentage price change
c. Modified convexity
d. Effective convexity
5. Price value of a basis point (or DV01) (including its relationship to duration)
H. The Term Structure and Volatility of Interest Rates
1. Yield curve shifts (e.g., parallel shift, nonparallel shift, twist, butterfly)
2. Treasury returns resulting from yield curve movements
3. Constructing the theoretical spot rate curve for Treasuries
a. On-the-run Treasury issues (par yield curve)
b. On-the-run Treasury issues and selected off-the-run treasury issues
c. All treasury coupon securities and bills
d. Treasury coupon strips
4. Theories of the term structure
a. The Pure Expectations Theory
b. Biased Expectations Theories
c. Market Segmentation Theory
d. Preferred Habitat Theory
5. Measuring yield curve risk (e.g., rate duration, key rate duration)
6. Yield volatility and measurement
a. Historical versus implied volatility
b. Forecasting yield volatility
I. Valuing Bonds with Embedded Options
1. The Binomial Model
2. Valuing and analyzing a callable bond
a. Determining the call option value
b. Effect of volatility on the arbitrage-free value
c. Option-adjusted spread (OAS)
d. Effective duration and effective convexity
e. Price/yield relationship of a callable vs. option-free bond
3. Valuing a putable bond
a. Determining the put option value
b. Effect of volatility on the value
c. Price/yield relationship of a putable vs. option-free bond
4. Analysis of convertible bonds
a. Investment characteristics of a convertible security
b. An option-based valuation approach for convertible securities
c. The risk/return profile of a convertible security
J. Mortgage-Backed Securities (MBS)
1. Features
a. Mortgage passthrough securities
(1) Cash flow characteristics
(2) Prepayment conventions and cash flow
b. Collateralized Mortgage Obligations (CMOs) including those with planned
amortization class (PAC) tranches
2. Stripped mortgage-backed securities
a. Principal-only (PO) strips including price change, duration, convexity
characteristics
b. Interest-only (IO) strips including price change, duration, convexity
characteristics
3. Nonagency mortgage-backed securities
4. Commercial mortgage-backed securities
5. International mortgage-backed securities
K. Asset-Backed Securities
1. Features of an asset-backed security
a. Amortizing versus nonamortizing assets
b. Fixed-rate versus floating-rate
c. Credit enhancements
d. Passthrough versus pay through structures
e. Optional clean-up call provisions
2. Types of securities
a. Auto loan-backed securities
b. Credit card receivable-backed securities
L. Valuing Mortgage-Backed and Asset-Backed Securities
1. Cash flow yield analysis (static cash flow yield)
a. Limitations of cash flow yield measure
b. Nominal spread
2. Zero-volatility spread (the Z-spread)
3. Monte Carlo simulation model and option-adjusted spread (OAS)
4. Measuring interest rate risk of MBS (including duration measures such as effective
duration, cash flow duration, coupon curve duration, empirical duration)
5. Valuing asset-backed securities
M. Assessing Trading Strategies
1. The principle of leverage
2. Borrowing funds via repurchase agreements (repo)
a. Margin and marking to market
b. Delivery and credit risk
c. Repo mechanics
d. Determinants of the Repo rate
3. Total return analysis
a. Computing the expected total return
b. Yield curve trades
4. Controlling for interest rate risk in assessing trading strategies
N. Principles of Credit Analysis
1. Analysis of an issuer’s character
2. Analysis of the capacity to pay
a. Industry analysis
b. Traditional ratios
c. Cash flow analysis
3. Analysis of collateral
4. Analysis of covenants
5. Analysis of management quality
6. Special considerations for high-yield corporate bonds
a. Analysis of debt structure
b. Analysis of corporate structure
c. Analysis of covenants
d. Equity analysis approach
e. Default rates on high yield securities
7. Credit analysis of non-corporate bonds
a. Asset-backed securities
b. Municipal bonds
c. Sovereign bonds
A. Debt Securities
1. Features of debt securities
a. Indenture and covenants
b. Maturity
c. Par value
d. Coupon rate
(1) Zero-coupon bonds
(2) Step-up notes
(3) Deferred coupon bonds
(4) Floating-rate securities
(5) Accrued interest
e. Conversion privilege
f. Put provision
g. Currency denomination
h. Embedded options
i. Borrowing funds to purchase bonds
(1) Margin buying
(2) Repurchase agreement (repos)
2. Provisions for paying off bonds
a. Call and refunding provision
(1) Call schedule
(2) Noncallable versus nonrefundable bonds
(3) Regular versus special redemption prices
b. Prepayments
c. Sinking fund provisions
d. Index amortizing notes
3. Debt market structure
a. Types of markets (e.g., direct search or private placement markets, brokered
markets, dealer markets, auction markets)
b. Electronic trading systems
B. Risks Associated with Investing in Bonds
1. Interest rate risk
a. Price/yield relationship
b. Impact of bond features on interest rate risk (e.g., maturity, coupon rate,
embedded options)
c. The impact of the yield level
d. Interest rate risk for floating-rate securities
e. Measuring interest rate risk (e.g., approximating percentage price change,
approximating dollar price change)
2. Yield curve risk
3. Call and prepayment risk
4. Reinvestment risk
5. Credit risk
a. Default risk
b. Credit spread risk
c. Downgrade risk
6. Liquidity risk
a. Liquidity risk and marking positions to market
b. Changes in liquidity risk
7. Exchange rate or currency risk
8. Inflation or purchasing power risk
9. Volatility risk
10. Event risk
a. Natural catastrophes
b. Corporate takeover / restructurings
c. Regulatory risk
d. Political risk
C. Global Bond Sectors and Instruments
1. U.S. Treasuries and other government securities
a. Types of Treasury securities (e.g., bills, notes, bonds, inflation protection
securities)
b. The Treasury auction process
c. The secondary market (e.g., on-the-run issues, off-the-run issues, role of
government securities dealers)
d. Pricing conventions
e. Treasury strips
(1) Coupon strips
(2) Principal strips
f. Federal agency securities
(1) Agency debentures
(2) Agency mortgage-backed securities
(a) Mortgage passthrough securities
(b) Collateralized mortgage obligations
2. Municipal securities (including European)
a. Tax-backed debt (e.g., general obligation debt, appropriation-backed obligation)
b. Revenue bonds
c. Special bond structures (e.g., insured bonds, prerefunded bonds)
3. Corporate debt instruments
a. Bankruptcy and bondholder rights
b. Factors considered in assigning a credit rating
c. Corporate bonds
d. Medium-term notes
e. Commercial paper
f. Bankers’ acceptances
g. Certificates of deposit
4. Asset-backed and mortgage-backed securities
a. The role of the special purpose vehicle
b. Credit enhancement mechanisms
5. International bonds
a. Global bonds
b. Sovereign debt
c. Emerging market bonds
D. Yield Spreads
1. The role of the central bank in influencing interest rates
a. Policy tools
b. Interest rates over the business cycle
c. Inflation and interest rates
2. The Treasury yield curve
3. Measuring yield spreads (e.g., absolute yield spread, relative yield spread)
a. Intermarket sector spreads and intramarket spreads
b. Credit spreads
c. Effect of embedded options
4. Effect of issue size/liquidity on spreads
E. Introduction to the Valuation of Debt Securities
1. General principles of valuation
a. Estimating cash flows
b. Determining the appropriate rate or rates
c. Discounting the expected cash flows
d. Valuation using multiple discount rates
e. Valuing semiannual cash flows
f. Valuing a zero-coupon bond
g. Valuing a bond between coupon payments
(1) Computing the full price
(2) Computing the accrued interest and the clean price
(3) Day count conventions
2. The arbitrage-free valuation approach (e.g., using treasury spot rates, credit spreads)
F. Yield Measures, Spot Rates, and Forward Rates
1. Sources of return
a. Coupon interest payments
b. Capital gain or loss
c. Reinvestment income
2. Traditional yield measures
a. Current yield
b. Yield to maturity (including bond equivalent yield convention)
c. Yield to call
d. Yield to put
e. Yield to worst
f. Cash flow yield
g. Yield spread measures for floating-rate securities
h. Yield on Treasury bills
3. Theoretical spot rates
a. Bootstrapping approach for constructing the theoretical spot rate curve for
treasuries
b. Yield spread measures relative to a spot rate curve
4. Forward rates
a. Deriving 6-month (i.e., 1-period) forward rates
b. Relationship between spot rates and short-term forward rates
c. Valuation using forward rates
d. Computing any forward rate
G. Measurement of Interest Rate Risk
1. The full valuation approach
a. Scenario analysis
b. Stress testing
c. Total return assumptions
d. Interpreting the results
2. Price volatility characteristics of bonds
a. Price volatility characteristics of option-free bonds (including price/yield
convexity)
b. Price volatility characteristics of bond with embedded options (e.g., call/prepay,
put)
3. Duration
a. Defining duration
b. Calculating duration
c. Approximating the percentage price change using duration
d. Size of rate changes and duration estimate
e. Modified duration versus effective duration
f. Macaulay duration and modified duration
g. Interpretations of duration (e.g., as first derivative, as some measure of time)
h. Duration of a floating-rate note (including inverse floaters)
i. Portfolio duration (including leverage, derivatives)
j. Spread duration for fixed-rate bonds
4. Convexity
a. Convexity measure
b. Convexity adjustment to percentage price change
c. Modified convexity
d. Effective convexity
5. Price value of a basis point (or DV01) (including its relationship to duration)
H. The Term Structure and Volatility of Interest Rates
1. Yield curve shifts (e.g., parallel shift, nonparallel shift, twist, butterfly)
2. Treasury returns resulting from yield curve movements
3. Constructing the theoretical spot rate curve for Treasuries
a. On-the-run Treasury issues (par yield curve)
b. On-the-run Treasury issues and selected off-the-run treasury issues
c. All treasury coupon securities and bills
d. Treasury coupon strips
4. Theories of the term structure
a. The Pure Expectations Theory
b. Biased Expectations Theories
c. Market Segmentation Theory
d. Preferred Habitat Theory
5. Measuring yield curve risk (e.g., rate duration, key rate duration)
6. Yield volatility and measurement
a. Historical versus implied volatility
b. Forecasting yield volatility
I. Valuing Bonds with Embedded Options
1. The Binomial Model
2. Valuing and analyzing a callable bond
a. Determining the call option value
b. Effect of volatility on the arbitrage-free value
c. Option-adjusted spread (OAS)
d. Effective duration and effective convexity
e. Price/yield relationship of a callable vs. option-free bond
3. Valuing a putable bond
a. Determining the put option value
b. Effect of volatility on the value
c. Price/yield relationship of a putable vs. option-free bond
4. Analysis of convertible bonds
a. Investment characteristics of a convertible security
b. An option-based valuation approach for convertible securities
c. The risk/return profile of a convertible security
J. Mortgage-Backed Securities (MBS)
1. Features
a. Mortgage passthrough securities
(1) Cash flow characteristics
(2) Prepayment conventions and cash flow
b. Collateralized Mortgage Obligations (CMOs) including those with planned
amortization class (PAC) tranches
2. Stripped mortgage-backed securities
a. Principal-only (PO) strips including price change, duration, convexity
characteristics
b. Interest-only (IO) strips including price change, duration, convexity
characteristics
3. Nonagency mortgage-backed securities
4. Commercial mortgage-backed securities
5. International mortgage-backed securities
K. Asset-Backed Securities
1. Features of an asset-backed security
a. Amortizing versus nonamortizing assets
b. Fixed-rate versus floating-rate
c. Credit enhancements
d. Passthrough versus pay through structures
e. Optional clean-up call provisions
2. Types of securities
a. Auto loan-backed securities
b. Credit card receivable-backed securities
L. Valuing Mortgage-Backed and Asset-Backed Securities
1. Cash flow yield analysis (static cash flow yield)
a. Limitations of cash flow yield measure
b. Nominal spread
2. Zero-volatility spread (the Z-spread)
3. Monte Carlo simulation model and option-adjusted spread (OAS)
4. Measuring interest rate risk of MBS (including duration measures such as effective
duration, cash flow duration, coupon curve duration, empirical duration)
5. Valuing asset-backed securities
M. Assessing Trading Strategies
1. The principle of leverage
2. Borrowing funds via repurchase agreements (repo)
a. Margin and marking to market
b. Delivery and credit risk
c. Repo mechanics
d. Determinants of the Repo rate
3. Total return analysis
a. Computing the expected total return
b. Yield curve trades
4. Controlling for interest rate risk in assessing trading strategies
N. Principles of Credit Analysis
1. Analysis of an issuer’s character
2. Analysis of the capacity to pay
a. Industry analysis
b. Traditional ratios
c. Cash flow analysis
3. Analysis of collateral
4. Analysis of covenants
5. Analysis of management quality
6. Special considerations for high-yield corporate bonds
a. Analysis of debt structure
b. Analysis of corporate structure
c. Analysis of covenants
d. Equity analysis approach
e. Default rates on high yield securities
7. Credit analysis of non-corporate bonds
a. Asset-backed securities
b. Municipal bonds
c. Sovereign bonds