1. Securities Analyst Program
2016 – 2017 Academic Year

2. Plan for the Year Investment Styles / Famous Investors
Fall
Winter
Investment Styles / Famous Investors
What Makes a Good Investment? & Valuation
Macroeconomic Analysis
Fixed Income
Other Asset Classes (Commodities, Derivatives)
Industry Specific Analysis
How To Leverage Resources
Key Moments in the History of Finance

3. Cover Our Bases: Time Value of Money1
Cover Our Bases: Time Value of Money 2
Yield Curve 3
How to Calculate a Bond Price? 4
Credit Spread & Duration 5
How to Invest in the Fixed Income Market?

4. Time Value of Money The Basics1
Do you prefer $1,000 today or $1,000 in 1 year?
Assume the interest rate is 10%
Is the answer impacted by the moment you need the money?
Assume you are given $1,000 now. How much is it worth in 1-year terms?
This is called compounding
Assume you are given $1,210 in 2-year. How much is it worth in 1-year terms? In today’s dollars?
This is called discounting 2 3 4

5. Time Value of Money Compounding –> You get to Future Value
Assume the interest rate is 12%, what is $100 received at t=0 worth at t=2?
$100 x (1+0.12) x (1+0.12) = $144
Assume the interest rate is 10%, you receive $100 at t=0 and you receive $10 at t=1. How much is it worth at t=2?
$100 x (1+0.10)^2 + $10 x (1+0.10)^1 = $121 + $11 = $132
Assume the interest rate is 10%, what is $100 received at t=0 worth at t=7
$100 x (1+0.1)^7 = $194.87
Rule of Thumb = 72 -> doubling time

6. Time Value of Money Discounting -> You Get To Present Value
Assume the interest rate is 10%, what is $121 received at t=2 worth at t=0?
$121 / (1+0.12)^2 = $100
Assume the interest rate is 10%, what is $110 received at t=1 and $121 received at t=2 worth at t=0?
$110 / (1+0.10) + $121 x (1+0.10)^2 = $100 + $100 = $200
Assume the interest rate is 10%, what is $10 receive every year at perpetuity worth?
$10 / 0.10 = $100
Intuition behind it, you could invest 10% for perpetuity and receive $10 per year

7. Cover Our Bases: Time Value of Money1
Cover Our Bases: Time Value of Money 2
Yield Curve 3
How to Calculate a Bond Price? 4
Credit Spread & Duration 5
How to Invest in the Fixed Income Market?

8. The Yield Curve?
There are different risk free rates for different maturities
Normal (Upward) Yield Curve
Flat Yield Curve
Inverted (Downward) Yield Curve
Negative Interest Rates?

9. The Yield Curve Movements
The Yield Curve Moves Over Time
Types of Movement

10. Low Interest Rate Environment
Current Yield Curve
United-States
Canada

11. Low Interest Rate Environment
Evolution of Interest Rates Over Time

12. Low Interest Rate Environment
Worldwide Yield Curve

13. Cover Our Bases: Time Value of Money1
Cover Our Bases: Time Value of Money 2
Yield Curve 3
How to Calculate a Bond Price? 4
Credit Spread & Duration 5
How to Invest in the Fixed Income Market?

14. Fixed Income Fixed Income From the Perspective of the Investor
Fixed Income Securities
Fixed-income securities provide investors a return in the form of fixed periodic payments and eventual return of principal at maturity.
Let’s assume that the required interest rate is 10% and you invest $100 at t=0.

15. Bond Price – Key Terms
Interest Rates Tell Me How Much I should Pay for A Bond
Yield curve is flat at 10%. You are buying a 3-year 10% coupon-bond. How much will I pay for that bond?
1 day after I buy the bond, the curve steepens. R1 = 9.5%. R2 = 10.0%. R3 = 10.5%. How much can I sell the bond for?
If a new investor comes in and buys the stock, how much does he make if he holds it to maturity?

16. Cover Our Bases: Time Value of Money1
Cover Our Bases: Time Value of Money 2
Yield Curve 3
How to Calculate a Bond Price? 4
Credit Spread & Duration 5
How to Invest in the Fixed Income Market?

17. Credit Rating The Different Credit Ratings Metrics To Look AT
Credit rating agencies:
Moody’s
S&P
Fitch
EBITA / Average Assets
EBITA / Interest Expense
EBITA Margin
(FFO + Interest Expense) / Interest Expense
FFO / Debt
Debt / EBITDA
Debt / Book Capitalization
Operating Margin
CAPEX / Depreciation Expense
Revenue Volatility

18. Credit Spread The Different Credit Spreads
A credit spread is the difference in yield between a government bond and a debt security with the same maturity

19. Credit Spread The Different Credit Spreads
The credit spread evolves over time. It increases when default risk (or perception of default risk) rises

20. Time 1 2 … n Cash Flow C1 C2 F + Cn Duration
Sensitivity of a Given Bond Price to Changes in Interest Rates
Interest rates go up -> bond prices go down
Interest rates go down -> bond prices go up
How do we measure the sensitivity?
Let’s assume the bond has the following cash flows:
Then duration is calculated as follow:
Time 1 2 … n
Cash Flow C1 C2
F + Cn

21. Duration Example MD = D/(1+YTM) = 1.93/1.08 = 1.78
A 2-year 8% coupon bond with face value of $100 has 8% YTM. Using the modified duration approximation, by how much will the bond price decrease if its YTM rises to 8.3%? P = $100.
Method 1
MD = D/(1+YTM) = 1.93/1.08 = 1.78
(Pinitial) = (100) = -0.53
New Price = 99.47
Method 2
Credits: Vadim Di Pietro

22. Cover Our Bases: Time Value of Money1
Cover Our Bases: Time Value of Money 2
Yield Curve 3
How to Calculate a Bond Price? 4
Credit Spread & Duration 5
How to Invest in the Fixed Income Market?

23. How to Invest in the Fixed Income Market?
Buying A Bond – Breaking Down Returns 1
Carry
Net cash income of holding a position
Position revenue: accrued coupons
Position expense: financing costs (neglected since DCM is an unlevered long-only fund)
Easy to calculate
Number of actual fractional year between the purchase settlement date and the sale settlement date multiplied by the annual coupon amount
Carry does not depend on market forces 2
Roll
P&L from bond price as maturity approaches, all other things being equal
As maturity approaches, future value of cash flows get re-evaluated at new time-appropriate discount rates
Example: you see 10Y at 5% and 9Y at 4% on the curve
1 year roll of 100bps: in a year, the 10Y bond will be valued at 4%, assuming constant curve shape
One year return: / −1= 14.4%
Roll is where we can take a view
Creditors target the yield on which the bond will roll onto, given an investment horizon
Example: you’re bullish on an issuer and have an investment horizon of 1-year, which debt do you buy?
1Y yielding at 4%
2Y yielding at 4%; you think it will be 2% in one year later

24. How to Invest in the Fixed Income Market?
Buying A Bond – Corporate or Government Bonds 1
Corporate Bonds
Holdings range in credit quality and industry
Look for spread compression or hold to maturity
Spread compression
Look for companies whose cash flow streams will be more stable than the market realizes, which warrants a lower credit spread
Can apply to both Investment Grade and High Yield credit
Hold to maturity
Look for bonds with attractive YTM to hold till maturity and for which you think the risk of default is lower 2
Government Bonds
Buying risk-free government bond or more risky foreign bonds
Holdings range in credit quality and duration

25. Other Ways to Invest in the Fixed Income Market
Bonds are Not Necessarily Meant to Be Boring
View
Strategy
Interest rates will go up
Long-term interest rates will go up more than short-term interest rates
Expecting the yield curve to become more convex
Protecting portfolio against inflation
Protecting against rise in interest rates
Betting on recovery rate during a bankruptcy
Shorting a bond
Curve steepener / widener
Butterfly trade
Treasury inflation protected securities
Floating rate bond
Buying discounted bonds of bankrupted companies 1 2 3 4 5 6