Course Outline

This course is intended to provide the same knowledge as the course of the same name for CFA Level I.

On completion of the course, attendees should understand the fundamentals of fixed-income investments and the market they operate in – and what defines and characterizes fixed-income securities. Attendees should be able to perform core analysis, valuation and understand the analysis risks associated with fixed-income securities. Topics include;

1. Fixed Income Securities: Defining Elements
2. Fixed Income Markets: Issuance, Trading and Funding
3. Fixed Income Valuation
4. Fixed Income Risk and Return
5. Fundamentals of Credit Analysis
6. Introduction to Asset-Backed Securities
7. Risks Associated with Investing in Bonds
8. Overview of Bond Sectors an Instruments
9. Understanding Yield Spreads
10. Valuing Bonds with Embedded Options
11. Yield Measures, Spot Rates and Forward Rates
12. Fixed Income Portfolio Benchmarks
13. Fixed-Income Portfolio Management Strategies
14. Risks Associated with Investing in Bonds
15. Analysis of Interest Rate Risk
16. Analysis of Credit Risk
17. Structured Products

The course should have an emphasis on practical teaching methods and worked examples to support learning, including a number of assessed exercises and tests

Course Objectives

On completion of this course, trainees should be able to;

1. Fixed Income Securities: Defining Elements
   • Describe the basic features of a fixed-income security;
   • Describe functions of a bond indenture;
   • Compare affirmative and negative covenants and identify examples of each;

• Describe how legal, regulatory, and tax considerations affect the issuance and trading of fixed-income securities;
• Describe how cash flows of fixed-income securities are structured;
• Describe contingency provisions affecting the timing and/or nature of cash flows of fixed-income securities and identify whether such provisions benefit the borrower or the lender.

2. Fixed Income Markets: Issuance, Trading and Funding
   • Describe classifications of global fixed-income markets;
   • Describe the use of interbank offered rates as reference rates in floating-rate debt;
   • Describe mechanisms available for issuing bonds in primary markets;
   • Describe secondary markets for bonds;
   • Describe securities issued by sovereign governments, non-sovereign governments, government agencies, and supranational entities;
   • Describe types of debt issued by corporations;
   • Describe short-term funding alternatives available to banks;
   • Describe repurchase agreements (repos) and their importance to investors who borrow short term.
3. Fixed Income Valuation
   • Calculate a bond’s price given a market discount rate;
   • Identify the relationships among a bond’s price, coupon rate, maturity, and market discount rate (yield-to-maturity);
   • Define spot rates and calculate the price of a bond using spot rates;
   • Describe and calculate the flat price, accrued interest, and the full price of a bond;
   • Describe matrix pricing;
   • Calculate and interpret yield measures for fixed-rate bonds, floating-rate notes, and money market instruments;
   • Define and compare the spot curve, yield curve on coupon bonds, par curve, and forward curve;
   • Define forward rates and calculate spot rates from forward rates, forward rates from spot rates, and the price of a bond using forward rates;
   • Compare, calculate, and interpret yield spread measures.
4. Fixed Income Risk and Return
   • Calculate and interpret the sources of return from investing in a fixed-rate bond;
   • Define, calculate, and interpret Macaulay, modified, and effective durations;
   • Explain why effective duration is the most appropriate measure of interest rate risk for bonds with embedded options;
   • Explain how a bond’s maturity, coupon, embedded options, and yield level affect its interest rate risk;
   • Calculate the duration of a portfolio and explain the limitations of portfolio duration;
   • Calculate and interpret the money duration of a bond and price value of a basis point (PVBP);
   • Calculate and interpret approximate convexity and distinguish between approximate and effective convexity;

• Estimate the percentage price change of a bond for a specified change in yield, given the bond’s approximate duration and convexity;
• Describe how the term structure of yield volatility affects the interest rate risk of a bond;
• Describe the relationships among a bond’s holding period return, its duration, and the investment horizon;
• Explain how changes in credit spread and liquid affect yield-to-maturity of a bond and how duration and convexity can be used to estimate the price effect of the changes.

5. Fundamentals of Credit Analysis
   • Describe credit risk and credit-related risks affecting corporate bonds;
   • Describe seniority rankings of corporate debt and explain the potential violation of the priority of claims in a bankruptcy proceeding;
   • Distinguish between corporate issuer credit ratings and issue credit ratings and describe the rating agency practice of “notching”;
   • Explain risks in relying on ratings from credit rating agencies;
   • Explain the components of traditional credit analysis;
   • Calculate and interpret financial ratios used in credit analysis;
   • Evaluate the credit quality of a corporate bond issuer and a bond of that issuer, given key financial ratios of the issuer and the industry;
   • Describe factors that influence the level and volatility of yield spreads;
   • Calculate the return impact of spread changes;
   • Explain special considerations when evaluating the credit of high yield, sovereign, and municipal debt issuers and issues.