Yield Curve Construction and Interest Rate Risk Management

Course Overview:

This course will teach participants about the key issues in the construction of yield curves and in managing interest rate risk. They will begin by leaning about the valuation of different cash flows and the discount rates that need to be used, as well as how such rates relate to each other and how they are calculated.

Participants will then move on to the creation of a term structure of interest rates and note the importance of a shift in this term structure and its implications. The concept of yield to maturity will be addressed and the tools for managing interest rate risk with different products will be taught, with participants mastering that lead to the mispricing of bonds and structured products.

The course will also include the benchmarking of bonds in different ways and the pricing and valuation of interest rate swaps.

Participants will be required to bring a scientific calculator to the course.

Course Outline:

Day 1

Introduction

• Course overview
• Setting the frame
• Cashflow and mathematical approach

Refresher on Interest Rate Mathematics (1 hrs)

• Capital market calculations
• Money market calculations
• Market conventions
• Interest rate conversions
• Summary

Bond Pricing (1 hrs)

• Pricing an Annual Bond
• Assumptions

Interest Rate Risk Management

• Break-Even Analysis of a bond investment
• Calculating Duration
• Modified Duration
• DV01
• Convexity

Bond Portfolio Management

• Creating a bond portfolio
• Measuring the interest rate risk of the portfolio
• Bond Portfolio Switching and riding the curve

Bond Trading and Hedging Strategies

• Credit spreads
• Time spreads
• Currency spreads

Strips and Asset-backed Securities(1 hrs)

• Tigers, Lions, Cats, Dogs and Strips
• Flat yield curve versus positively shaped yield curve
• Flat yield curve versus negatively shaped yield curve
• Influence on pricing
• Arbitrage or mispricing

Day 2

Bond Pricing Revisited (1/2 hr)

• Bond Stripping
• Bootstrapping and Zero-Coupon Pricing
• Input Factors to create a term-structure of interest rates

Term-structure of Interest Rates (1 hr)

• Creating the Yield Curve
• Different shapes of the yield curve
• Flat yield curve, and negative versus positive yield curve
• The importance of the Par Curve
• How to create the Zero Curve
• How to calculate the Forward Curve

Credit Markets and Interest Rate Benchmarking

• Government
• Bank
• Corporate

Introduction to Interest Rate and Currency Swaps (2 hrs)

• Explanation of the principals behind a swap
• Efficient use of capital

Different types of Swaps

• Coupon Swaps
• Basis Swaps
• Interest rate Swaps
• Currency swaps

Uses of Swaps

• How to speculate with swaps
• How to hedge using swaps
• Applications for Asset and Liability Management
• Market making for swaps
• How to use swaps to manage interest rate risk
• Trading profits from arbitrage (for borrowers and investors)
• Cost reduction in debt origination by using swaps
• Increasing value of an investment with asset swaps
• Creating new synthetic products

The Principal of Swap Pricing and Valuation (1 hr)

• Valuing the Floating Leg
• Valuing the Fixed Leg
• Input Factors required for pricing a swap
• Swap Rates and Yield to Maturity
• Yield to Maturity as the key measure of all market information
• PVBP

The term-structure of interest rates (II)

• Comparing yield to maturity with swaps
• The inherent relation between swaps and bonds
• Correlations between different credits

Asset Swap Pricing (1 hrs)

• Pricing Par-par structures
• Pricing Premium-par structures
• Pricing Discount-par structures
• Pricing Structured Bonds

Benchmarking Interest Rate Risk

• Yield spread
• Swap spread
• Using Asset Swap Margin for benchmarking (Libor spread)

Delivering this course in-house for you to a number of participants could be very cost effective. Please call us on 020 7387 4484 to discuss this further.

If you have any questions about this seminar please write to us at post@redcliffetraining.co.uk.