Yield and Duration

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Course Features

  • Course Code: 805
  • Certificate: Yes
  • CPE Credits: 7
  • Level: Beginner-intermediate
  • Prerequisites: None
  • Method: Live & Virtual
  • Venue: MicroTek
  • Time: 9:00 am – 5:00 pm
  • Registration: 8:30 am
  • Dress Code: Business Casual
  • Category:
  • Course Duration: 1 Day
  • Available Course date: 08/21/2019

YIELD TO MATURITY AS AN EXPRESSION OF VALUE

  • Calculation of Yield to Maturity (and Yield to Call)
    • Iterative process to obtain periodic rate, times periods/year to annualize
    • Confusion due to multiple meanings implied by yield
    • Yield to maturity (or yield to call) versus rate of return
    • Potential problems with using yield as a proxy for future returns
    • Assumptions errantly attributed to calculation of yield to maturity/call
    • Yield – market price re-expressed as a single interest (discount) rate
    • How embedded option for early retirement impact interpretation
  • Understanding Yield to Maturity (or Call) as an Expression Of Value
    • Using zero coupon bonds to illustrate precisely how yield expresses value
    • Rate at which invested dollars are growing: cost today per dollar at maturity
    • Migrating concept to coupon bonds, complication of multiple cash flows
    • Average growth rate of dollars invested: relative cost of future cash flows
  • Advantage of using yield rather than price to assess relative value and risk

 

USING YIELD TO ASSESS THE RELATIVE VALUE OF BONDS OR SECTORS

  • Insights Available from Comparing Bond Yields
    • Value (cost) of future cash flows rendered on a standardized basis
    • Differences in risk can be correlated to differences in relative cost
    • How differences in yields reflect market’s pricing of risk
    • How differences in yields embody market expectations
  • Case Studies Using Yield to Evaluate Relative Value and Risk
    • Same maturity U.S. Treasuries bearing different coupon rates
    • Same maturity and coupon Treasury and investment grade corporate
    • Same maturity Treasury and high yield corporate

 

DURATION AND CONVEXITY OF NON-CALLABLE BONDS

  • Introduction to Duration
    • Initial development and intended application
    • Rediscovery and new application (1970s/immunization)
    • Types of duration – Macaulay’s, modified, effective, dollar, spread, etc.
  • Mathematical Foundations of Duration for Non-callable Bonds
    • Macaulay’s duration formula
    • Duration: modified = Macaulay’s/(1 + i) = dP/di ÷ price (annual pay)
    • Dollar duration = dP/di (annual compound)
    • Dollar convexity = d2P/di(annual compound)
    • Implication of duration and convexity being first and second derivatives
    • Illustration of estimated versus actual price change

 

USING DURATION TO QUANTIFY AND MANAGE INTEREST RATE RISK

  • Practical Interpretation of Duration and Convexity for Individual Securities
    • Macaulay duration – length of bond’s life (long-ness per Macaulay)
    • Duration – sensitivity of a bond’s price to change in its yield
    • Convexity – change in a bond’s price sensitivity as its’ yield changes
  • Bond Portfolio Duration
    • Sensitivity of portfolio value to interest rate changes
    • Potential complications: bond versus portfolio duration
  • Hedging Bond Positions with Treasury Futures or Interest Rate Swaps
    • Determine hedge, risk of hedged position, possible additional actions
    • Treasury security positions
    • Investment grade corporate bond positions
    • High yield corporate bond positions
    • MBS dealers hedging inventory
  • Bond Portfolio Applications of Duration
    • Interest rate strategies: altering portfolio duration versus benchmark index
    • Using derivatives to alter portfolio duration
    • Structuring enhanced index funds to replicate performance of benchmark

 

Instructor

  • John Donato has a broad range of experience in the financial industry, including trading, brokering, and designing many aspects of real-time fixed income and foreign exchange trading systems for interdealer markets. John began his career with trading and risk management roles in fixed income and foreign exchange markets with commercial banks in New York. Among …
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