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The Synthetic Collateralised Debt Obligation: Analysing the Super-Senior Swap Element
The Synthetic Collateralised Debt Obligation: analysing the Super-Senior Swap element Nicoletta Baldini * July 2003 Basic Facts In a typical cash flow securitization a SPV (Special Purpose Vehicle) transfers interest income and principal repayments from a portfolio of risky assets, the so called asset pool, to a prioritized set of tranches. The level of credit exposure of every single tranche depends upon its level of subordination: so, the junior tranche will be the first to bear the effect of a credit deterioration of the asset pool, and senior tranches the last. The asset pool can be made up by either any type of debt instrument, mainly bonds or bank loans, or Credit Default Swaps (CDS) in which the SPV sells protection1. When the asset pool is made up solely of CDS contracts we talk of ‘synthetic’ Collateralized Debt Obligations (CDOs); in the so called ‘semi-synthetic’ CDOs, instead, the asset pool is made up by both debt instruments and CDS contracts. The tranches backed by the asset pool can be funded or not, depending upon the fact that the final investor purchases a true debt instrument (note) or a mere synthetic credit exposure. Generally, when the asset pool is constituted by debt instruments, the SPV issues notes (usually divided in more tranches) which are sold to the final investor; in synthetic CDOs, instead, tranches are represented by basket CDSs with which the final investor sells protection to the SPV. In any case all the tranches can be interpreted as percentile basket credit derivatives and their degree of subordination determines the percentiles of the asset pool loss distribution concerning them It is not unusual to find both funded and unfunded tranches within the same securitisation: this is the case for synthetic CDOs (but the same could occur with semi-synthetic CDOs) in which notes are issued and the raised cash is invested in risk free bonds that serve as collateral. -
Understanding the Z-Spread Moorad Choudhry*
Learning Curve September 2005 Understanding the Z-Spread Moorad Choudhry* © YieldCurve.com 2005 A key measure of relative value of a corporate bond is its swap spread. This is the basis point spread over the interest-rate swap curve, and is a measure of the credit risk of the bond. In its simplest form, the swap spread can be measured as the difference between the yield-to-maturity of the bond and the interest rate given by a straight-line interpolation of the swap curve. In practice traders use the asset-swap spread and the Z- spread as the main measures of relative value. The government bond spread is also considered. We consider the two main spread measures in this paper. Asset-swap spread An asset swap is a package that combines an interest-rate swap with a cash bond, the effect of the combined package being to transform the interest-rate basis of the bond. Typically, a fixed-rate bond will be combined with an interest-rate swap in which the bond holder pays fixed coupon and received floating coupon. The floating-coupon will be a spread over Libor (see Choudhry et al 2001). This spread is the asset-swap spread and is a function of the credit risk of the bond over and above interbank credit risk.1 Asset swaps may be transacted at par or at the bond’s market price, usually par. This means that the asset swap value is made up of the difference between the bond’s market price and par, as well as the difference between the bond coupon and the swap fixed rate. -
Not for Reproduction Not for Reproduction
Structured Products Europe Awards 2011 to 10% for GuardInvest against 39% for a direct Euro Stoxx 50 investment. “The problem is so many people took volatility as a hedging vehicle over There was also €67.21 million invested in the Theam Harewood Euro time that the price of volatility has gone up, and everybody has suffered Long Dividends Funds by professional investors. Spying the relationship losses of 20%, 30%, 40% on the cost of carry,” says Pacini. “When volatility between dividends and inflation – that finds companies traditionally spiked, people sold quickly, preventing volatility from going up on a paying them in line with inflation – and given that dividends are mark-to-market basis.” House of the year negatively correlated with bonds, the bank’s fund recorded an The bank’s expertise in implied volatility combined with its skills in annualised return of 18.98% by August 31, 2011, against the 1.92% on structured products has allowed it to mix its core long forward variance offer from a more volatile investment in the Euro Stoxx 50. position with a short forward volatility position. The resulting product is BNP Paribas The fund systematically invests in dividend swaps of differing net long volatility and convexity, which protects investors from tail maturities on the European benchmark; the swaps are renewed on their events. The use of variance is a hedge against downside risks and respective maturities. There is an override that reduces exposure to the optimises investment and tail-risk protection. > BNP Paribas was prepared for the worst and liabilities, while providing an attractive yield. -
BASIC BOND ANALYSIS Joanna Place
Handbooks in Central Banking No. 20 BASIC BOND ANALYSIS Joanna Place Series editor: Juliette Healey Issued by the Centre for Central Banking Studies, Bank of England, London EC2R 8AH Telephone 020 7601 3892, Fax 020 7601 5650 December 2000 © Bank of England 2000 ISBN 1 85730 197 8 1 BASIC BOND ANALYSIS Joanna Place Contents Page Abstract ...................................................................................................................3 1 Introduction ......................................................................................................5 2 Pricing a bond ...................................................................................................5 2.1 Single cash flow .....................................................................................5 2.2 Discount Rate .........................................................................................6 2.3 Multiple cash flow..................................................................................7 2.4 Dirty Prices and Clean Prices.................................................................8 2.5 Relationship between Price and Yield .......................................................10 3 Yields and Yield Curves .................................................................................11 3.1 Money market yields ..........................................................................11 3.2 Uses of yield measures and yield curve theories ...............................12 3.3 Flat yield..............................................................................................12 -
Asset Swaps and Credit Derivatives
PRODUCT SUMMARY A SSET S WAPS Creating Synthetic Instruments Prepared by The Financial Markets Unit Supervision and Regulation PRODUCT SUMMARY A SSET S WAPS Creating Synthetic Instruments Joseph Cilia Financial Markets Unit August 1996 PRODUCT SUMMARIES Product summaries are produced by the Financial Markets Unit of the Supervision and Regulation Department of the Federal Reserve Bank of Chicago. Product summaries are pub- lished periodically as events warrant and are intended to further examiner understanding of the functions and risks of various financial markets products relevant to the banking industry. While not fully exhaustive of all the issues involved, the summaries provide examiners background infor- mation in a readily accessible form and serve as a foundation for any further research into a par- ticular product or issue. Any opinions expressed are the authors’ alone and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System. Should the reader have any questions, comments, criticisms, or suggestions for future Product Summary topics, please feel free to call any of the members of the Financial Markets Unit listed below. FINANCIAL MARKETS UNIT Joseph Cilia(312) 322-2368 Adrian D’Silva(312) 322-5904 TABLE OF CONTENTS Asset Swap Fundamentals . .1 Synthetic Instruments . .1 The Role of Arbitrage . .2 Development of the Asset Swap Market . .2 Asset Swaps and Credit Derivatives . .3 Creating an Asset Swap . .3 Asset Swaps Containing Interest Rate Swaps . .4 Asset Swaps Containing Currency Swaps . .5 Adjustment Asset Swaps . .6 Applied Engineering . .6 Structured Notes . .6 Decomposing Structured Notes . .7 Detailing the Asset Swap . -
Introduction Section 4000.1
Introduction Section 4000.1 This section contains product profiles of finan- Each product profile contains a general cial instruments that examiners may encounter description of the product, its basic character- during the course of their review of capital- istics and features, a depiction of the market- markets and trading activities. Knowledge of place, market transparency, and the product’s specific financial instruments is essential for uses. The profiles also discuss pricing conven- examiners’ successful review of these activities. tions, hedging issues, risks, accounting, risk- These product profiles are intended as a general based capital treatments, and legal limitations. reference for examiners; they are not intended to Finally, each profile contains references for be independently comprehensive but are struc- more information. tured to give a basic overview of the instruments. Trading and Capital-Markets Activities Manual February 1998 Page 1 Federal Funds Section 4005.1 GENERAL DESCRIPTION commonly used to transfer funds between depository institutions: Federal funds (fed funds) are reserves held in a bank’s Federal Reserve Bank account. If a bank • The selling institution authorizes its district holds more fed funds than is required to cover Federal Reserve Bank to debit its reserve its Regulation D reserve requirement, those account and credit the reserve account of the excess reserves may be lent to another financial buying institution. Fedwire, the Federal institution with an account at a Federal Reserve Reserve’s electronic funds and securities trans- Bank. To the borrowing institution, these funds fer network, is used to complete the transfer are fed funds purchased. To the lending institu- with immediate settlement. -
Introduction to Repo Markets
Understanding Repo Markets Moorad Choudhry Objectives of the Course g Defining and describing the mechanics of Repo g Understanding market fundamentals and applying knowledge gained to daily work in the repo markets g Introducing trading theory and strategy (c) 2000 The Securities Institute (Services) Ltd 2 Agenda g Introduction and Market Background g Financial Arithmetic g Uses and Economic Functions g Mechanics of Repo g Risks in trading Repo g Legal, Accounting, Tax and Capital g Repo netting g Overseas and Central Bank Repo g Case study - repo trades (c) 2000 The Securities Institute (Services) Ltd 3 Agenda (cont.) g The UK Gilt Repo Market g Trading and Hedging Strategy g Electronic Repo Trading g The Implied Repo Rate and Basis Trading g The Yield Curve TM g Using Bloomberg Screens g Introduction to Equity repo (c) 2000 The Securities Institute (Services) Ltd 4 Introduction (c) 2000 The Securities Institute (Services) Ltd 5 Definition of a Repo g The term “Repo” is from “Sale and Repurchase Agreement” Repo is a money market instrument. There are two usually two parties to a repo transaction. g One party “sells” bonds to the other while simultaneously agreeing to repurchase them or receive them back at a specified future date g One party requires either the cash or the bonds and provides collateral to the other as well as compensation for the temporary use of the desired asset g Although legal title to the collateral is transferred, the seller/lender retains both the economic benefits and the market risk of owning them g If cash -
Bloomberg Integration in Fixed Income
Bloomberg Integration in Fixed Income Bloomberg for Education Seminar July 21, 2017 San Francisco Paul Fjeldsted, CFA Senior Lecturer Jon M. Huntsman School of Business Utah State University Outline Overview • Rationale • Class Overview • Bloomberg Market Concepts • Problem Sets • Bloomberg In-Class Integration • Investing Practicum Integration Rationale Why Bloomberg? Pros Cons • Connection to practice • Cost • Dynamic • Interface • Robust Rationale Configuration • 9 desktop licenses in dedicated lab for students • 3 Bloomberg Anywhere licenses for professors • Bloomberg Anywhere can be launched in any classroom Fixed Income Course Overview FIN 5300 FIXED INCOME • 20-25 students, masters level course • CFA Curriculum integration – Level 1 and Level 2 Fixed Income volumes Fixed Income Course Overview Grading Exams (4 @ 100 each) 400 Problem Sets 50 Investment Activity 30 In-Class Questions 20 Total 500 Bloomberg Market Concepts Bloomberg Market Concepts • Required within first two weeks of semester • Prerequisite to handing in first problem set • Overview – high level • Brings students up to speed on language of finance Bloomberg Problem Sets Bond Valuation Problem Sets – General Approach • Select a bond in Bloomberg • Model its cashflows in excel • Replicate price • Replicate risk measures Bloomberg Problem Sets Example – US Treasury Note Problem Set • In Bloomberg, select US Treasury note or bond with at least 10 years remaining • Pull up the bond in Bloomberg. Assume $1,000,000 face value • Type "YA" for yield analysis. Download this -
Fixed Rate Bond Valuation and Risk
Fixed Rate Bond Valuation and Risk FinPricing Fixed Rate Bond Summary ▪ Fixed Rate Bond Introduction ▪ The Use of Fixed Rate Bond ▪ Valuation: Yield-to-Maturity Approach ▪ Valuation: Credit Spread Approach ▪ Practical Guide ▪ A Real World Example Fixed Rate Bond Fixed Rate Bond Introduction ▪ A bond is a debt instrument in which an investor loans money to the issuer for a defined period of time. ▪ The investor will receive coupons paid by the issuer at a predetermined interest rate at specified dates before bond maturity. ▪ The bond principal will be returned at maturity date. ▪ A fixed rate bond is usually a long term paper. ▪ Bonds are usually issued by companies, municipalities, states/provinces and countries to finance a variety of projects and activities. Fixed Rate Bond The Use of Fixed Rate Bond ▪ Fixed rate bonds generally pay higher coupons than interest rates. ▪ An investor who wants to earn a guaranteed interest rate for a specified term can choose fixed rate bonds. ▪ The benefit of a fixed rate bond is that investors know for certain how much interest rate they will earn and for how long. ▪ Due to the fixed coupon, the market value of a fixed rate bond is susceptible to fluctuation in interest rate and therefore has a significant interest rate risk. ▪ The long maturity schedule and fixed coupon rate offers an investor a solidified return. ▪ The real value of a fixed rate bond is also susceptible to inflation rate given its long term Fixed Rate Bond Valuation: Yield-to-Maturity Approach ▪ There are two types of bond valuation approaches in the market: yield-to-maturity approach and credit spread approach. -
16. Asset Swaps
NOT FOR ONWARD DISTRIBUTION RATES UNIVERSITY 16. Asset Swaps Global Rates Products London Phone: +44 20 7986 9050 Email: *FI EU Rate Structuring Hong Kong Phone: +852 2501 2545 Email: *FI AP Rate Structuring New York Phone: +1 212 723 6136 Email: *FI US Rate Structuring Tokyo Phone: +813 6270 7173 Email: *FI AP Rate Structuring 1 Contents This module is an introduction to Asset Swaps. An Asset Swap combines the purchase or sale of a security with an interest rate swap. The interest rate swap allows the investor to transform the cashflows of the Asset into a synthetic Bond with more desirable risk / return properties. We will look at the following ... • recap of Basic Swaps • Asset Swap definition • Par Asset Swaps vs market value Asset Swaps • Asset Swap examples 2 Swap Recap A simple swap can be looked at as 2 simultaneous loans (or Bonds) Fixed Rate loan / Bond Party B has lent the Notional Amount to Party A as a fixed rate loan Thus Party A makes fixed rate interest payments to Party B Floating Rate loan / Bond Party A has lent the Notional Amount to Party B as a floating rate loan Thus Party B makes floating rate interest payments to Party A Notional Start Notional Flows Notional Maturity Notional Flows Fixed Flows Coupon flows Party A Party B Floating Flows Each side of the swap is priced separately. Notional The value of the swap is the Net Present Value. Notional In a Cross Currency swap it is essential to include the Notional exchanges at Start & Maturity, since these are real cashflows in different currencies. -
Fabozzi Course.Pdf
Asset Valuation Debt Investments: Analysis and Valuation Joel M. Shulman, Ph.D, CFA Study Session # 15 – Level I CFA CANDIDATE READINGS: Fixed Income Analysis for the Chartered Financial Analyst Program: Level I and II Readings, Frank J. Fabozzi (Frank J. Fabozzi Associates, 2000) “Introduction to the Valuation of Fixed Income Securities,” Ch. 5 “Yield Measures, Spot Rates, and Forward Rates,” Ch. 6 “Introduction to Measurement of Interest Rate Risk,” Ch. 7 © 2002 Shulman Review/The Princeton Review Fixed Income Valuation 2 Learning Outcome Statements Introduction to the Valuation of Fixed Income Securities Chapter 5, Fabozzi The candidate should be able to a) Describe the fundamental principles of bond valuation; b) Explain the three steps in the valuation process; c) Explain what is meant by a bond’s cash flow; d) Discuss the difficulties of estimating the expected cash flows for some types of bonds and identify the bonds for which estimating the expected cash flows is difficult; e) Compute the value of a bond, given the expected cash flows and the appropriate discount rates; f) Explain how the value of a bond changes if the discount rate increases or decreases and compute the change in value that is attributable to the rate change; g) Explain how the price of a bond changes as the bond approaches its maturity date and compute the change in value that is attributable to the passage of time; h) Compute the value of a zero-coupon bond; i) Compute the dirty price of a bond, accrued interest, and clean price of a bond that is between coupon -
International Capital Market Association International Fixed Income and Derivatives Certificate Programme Syllabus
International Capital Market Association International Fixed Income and Derivatives Certificate Programme Syllabus 1 Copyright © December 2012 ICMA. All rights reserved. Contents I. Introduction ......................................................................................................................................... 3 II. Structure of the IFID Certificate Syllabus ............................................................................................ 4 1. Fixed Income Analysis ......................................................................................................................... 5 1.1. Bond markets, pricing and yield .................................................................................................. 5 1.2. Yield Curve Dynamics ................................................................................................................... 5 1.3. Spot and forward yields ............................................................................................................... 6 1.4. Interest Rate Futures ................................................................................................................... 6 1.5. Interest rate risk ........................................................................................................................... 6 2. Rates Trading and Hedging ................................................................................................................. 8 2.1. Securities Financing ....................................................................................................................