Corporate Bonds - Analysis, Valuation and Portfolio Management

Duration:
2 days
Location:
Prague, NH Hotel Prague
  • Recent Trends in Corporate Bond Markets
  • The US and European Corporate Bond Markets
  • Pricing and Valuation of Corporate Bonds
  • Credit Risk Analysis of Corporate Bonds
  • Constructing Optimal Corporate Bond Portfolios
  • Managing Interest Rate in Corporate Bond Portfolios
  • Managing Credit Risk in Corporate Bond Portfolios
  • Managing Market Liquidity Risk
Corporate bonds have attracted wide interest in recent years. To investors, corporate bonds offer an attractive alternative to low-yielding government bonds and risky equities. Issuers see the corporate bond market as an alternative to bank financing, which has become difficult and/or expensive to obtain post-crisis.

The purpose of this course is to give you a good understanding of corporate bonds, of their investment and risk characteristics, and of their importance as an asset class.

We start with introduction to corporate bonds and corporate bond markets. We discuss recent developments and trends in these markets and we give an overview of the different types and legal forms of bonds. We also explain how and where bonds are issued and how they are traded.

Further, we explain how corporate bonds are priced, traded and valued in the primary and secondary markets. We explain factors that affect the liquidity and pricing of corporate bonds, and we give examples of how bonds are priced on the basis of swap-curves and various benchmarks.

We then turn to credit analysis of bonds. We give you a thorough review of fundamental and quantitative methods for assessing the quality and credit risk of "investment grade" as well as "high yield" corporate bonds. We illustrate with practical, real-life examples. We also explain the rating agencies approaches to assessing the credit quality of corporate bond issues.

On day two, we focus on portfolio management. We explain and demonstrate how optimal portfolios can be constructed using traditional mean-variance techniques as well as more sophisticated methods, including a "rating transition" framework. Further, we explain how to manage interest and FX risks in corporate bond portfolios, with particular emphasis on the importance of managing the portfolio's duration in a low-yield environment. We also explain and demonstrate how credit risk and credit spread risk can be hedged using single-name and, basket and index credit default swaps. Finally, we discuss how to measure and manage the market liquidity risk of a corporate bond portfolio. We study the exposure of corporate bond returns to liquidity shocks and explain the different effects that such shocks have on investment grade speculate grade bonds. We also explain the existence of time-varying liquidity risk of corporate bond returns and discuss experiences from recent episodes of flight to liquidity.

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to Corporate Bonds and Corporate Bond Markets

  • Recent Trends in Corporate Bond Markets
  • Features of Corporate Bonds
  • Types and Legal Forms of Bonds
  • The US and European Corporate Bond Markets
  • Investment Grade vs. High Yield Bonds
  • Issuing Corporate Bonds
  • Corporate Asset Backed Securities

Pricing and Valuation of Corporate Bonds

  • General Principles of Corporate Bond Valuation
  • Post-Crisis Market Conditions and their Impacts on Volumes, Pricing, Risks
  • Liquidity, Trading and Trading Costs
  • Primary vs. Secondary Market Pricing
  • Understanding the Quotation of Corporate Bond Prices
  • Benchmarks for Corporate Bond Pricing
    • The swaps framework
    • The iTraxx and CDX CDS indexes
  • Yield Measures and Corporate Spread Curves
  • Valuing Corporate Bonds with Embedded Options
  • Practical Examples and Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Credit Risk Analysis of Corporate Bonds

  • The Anatomy of Corporate Credit Risk
    • Default risk
    • General and specific credit spread risk
  • Fundamental Credit Analysis
    • Fundamental business analysis
    • Financial characteristics and policy
    • Coverage ratios
    • Cash flows and debt servicing capacity
  • Importance of Bonds’ Legal Characteristics
    • Indenture vs. debenture
    • Subordination
    • Covenants
  • Analysis of Credit Enhancements
  • Understanding External Ratings
    • Rating institutions and their methodologies
    • Ratings and their interpretations
  • Using Merton-Type Structural Models to Assess the Credit Riskiness of Bonds
  • Case Studies and Small Exercise

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Managing Corporate Bond Portfolios

  • Mean-Variance Optimization of Corporate Bond Portfolios
    • Credit returns and credit correlations
    • Optimization methods
    • Setting up the constraints and the optimization problem
    • Optimal portfolio composition
    • Assessing the robustness of the portfolio composition
    • Case study: Using “Babcock’ s formula” to construct an optimal portfolio
  • Portfolio Rebalancing Strategies
    • Identifying sell transactions
    • Identifying the rebalancing trades
  • Special Considerations in Managing High-Yield Portfolios
  • A Rating Transition Framework for a Corporate Bond Strategy
    • Adjusting the credit migration matrix
    • The Importance of the investment horizon
    • Balancing risk appetite and diversification
    • Stable allocation strategies
    • Optimization of the credit return
    • Conditional optimization incl. rebalancing
    • Stress testing the models
  • Practical Examples and Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Managing Corporate Bond Portfolios (continued)

  • Managing Interest Rate and FX Risk in Corporate Bond Portfolios
    • Measuring duration and spread duration
    • Measuring yield volatility, spread volatility and yield ratios
    • Constructing “immunized” portfolios
    • Constructing “credit barbells” to maximize risk-return relationship
    • Using swaps, caps floors and swaptions to hedge interest rate risk
    • Hedging FX risk with forwards, options and swaps
  • Managing Credit Risk in Corporate Bond Portfolios
    • Default-only vs. credit migration risk
    • Quantifying portfolio credit risk
    • Using credit derivatives to manage credit portfolio risk
    • Managing credit migration and spread risk
    • Measuring and managing credit correlation risk
  • Measuring and Managing Market Liquidity Risk in Corporate Bond Portfolios
    • The exposure of corporate bond returns to liquidity shocks
    • The time-varying nature liquidity risk of corporate bond returns
    • Experiences from flight-to-quality episodes
    • Increasing the portfolios resilience against liquidity shocks
  • Practical Examples and Small Exercises

Summary, Evaluation and Termination of the Seminar

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