二级固定收益串讲.pdfVIP

FIXED INCOME Study Session 14 15 Valuation Concepts AND Structured Securities 2011年5月8日 杨 凌 Readings 51 General Principles of Credit Analysis Readings 52 Liquidity Conundrum Readings 53 Term Structure and Volatility of Interest Rate Readings 54 Valuing Bonds with Embedded Options Readings 55 Mortgage Backed Sector of the Bond Market Readings 56 Asset Backed Sector of the Bond Market Readings 57 Valuing Mortgage Backed and Asset Backed securities 1 华章仁达华章仁达 Credit Risk Spread widening will push price lower Risk that Issuer will default Rating agencies lower the ratings SPREAD Default RiskDefault Risk Credit Spread Risk Credit Spread Risk Downgrade Risk 51 a 2 华章仁达华章仁达 Traditional Credit Analysis 4 C s 51 b Industry trends The regulatory environment Basic operating and competitive position Financial position and sources of liquidity Company structure Parent company support agreements Special event risk Strategic direction Financial philosophy Conservatism Track record Succession planning Control Affirmative Covenants Negative Covenants CapacityCollateral CovenantsCharacte r 3 华章仁达华章仁达 Capacity Traditional Ratios Profitability Ratios Debt and Coverage ROE ROA Profit Margin Asset Turnover Short term solvency ratios Current ratio Acid test ratio Capitalization ratios leverage Long term debt and total debt Coverage Ratios EBIT EBITDA funds from operations total debt free operation CF Capacity Traditional Ratios 51 c d 4 华章仁达华章仁达 Debt Service Coverage ratio DSC Capacity Cash flow Analysis Cash Flow Ratios Debt Payback Period DPP 51 d e Ledd Computers is currently rated A which of the following statements best describes Ledd s position concerning a ratings change 5 华章仁达华章仁达 Credit Analysis HY Bond Debt structure Corporate structure Covenants Equity approach is used Bank debt Floating Short term and Senior Brokers loans or bridge loans Reset notes Senior debt Senior subordinated debt Subordinated debt payment in kind bonds Holding Company structure Analysis on subsidiaries is important 51 f 6 华章仁达华章仁达 Credit Analysis ABS Credit Quality of Collateral Most important issue for ABS Underling borrower s ability Concentration risk Diversification Credit enhancement Seller Servicer quality The role of servicer track record experience servicing capacity financial strength etc True securitization vs hybrid transaction quasi corporate approach on servicer Cash flow stress and Payment structure scenarios analysis used Loss estimation to determine the rating Legal Structure Better rating then corporate bond SPV mechanism Key protect the buyer of ABS from having a bankruptcy judge redirect the collateral to the creditors of the selling corporation 51 g j 7 华章仁达华章仁达 Tax backed Debt structure budget policy local tax and intergovernmental revenue availability and socioeconomic Revenue Backed Limits of the Basic Security Flow of Funds structure Rate or user charger covenants Priority of revenue claims Additional bond Test Other relevant Covenants Credit Analysis Munis Similarity 1 Character 2 Capacity 51 h j 8 华章仁达华章仁达 Credit Analysis Sovereign Bonds Economic risk Capacity Political Risk Character Local currency debt rating domestic government policies Foreign currency debt ratings interaction of domestic and foreign govnt policies 51 i j 9 华章仁达华章仁达 Liquidity Conundrum Liquidity is a state of mind Liquidity is not a fixed pool of Money The greater risk appetite the greater liquidity The alignment or misalignment of the 2 investors determines the abundance or shortage of liquidity 52 abc Stability is destabilizing HedgeSpeculativePonzi Minsky Journey Free at the money call on the property granted to the borrower 10 华章仁达华章仁达 Yield Curve Changes Parallel Non Parallel Parallel Shift Non Parallel Shift 53 ab 3 Factors driving UST s return 1 Level change 90 2 Slope change 8 5 3 Curvature change 1 5 11 华章仁达华章仁达 Treasury Spot Rate Curve Universe of Treasuries Advantages Disadvantages 1 Treasury Strips Adv Provide straightforward yields for most of maturities without bootstrapping Dis Liquidity premium and tax treatment 2 All On the run Treasuries Adv most accurately priced issues are used Dis Large maturity gaps after 5yr note 3 All On the run and Some Off the Run Treasuries Adv Reduce the maturity gap Dis Not include all Treasuries info and maybe distorted by repo market 4 All Treasury Coupon Securities and Bills Adv Include all the issues info Dis Some maturities maybe have one more yield In selecting the universe of securities used to construct a default free spot rate curve one wants to make sure that the yields are not biased by any of the following 1 default 2 embedded options 3 liquidity and 4 pricing errors 53 c 12 华章仁达华章仁达 Why use Swap Curve There is almost no government regulation of the swap market The lack of government regulation makes swap rates across different markets more comparable The supply of swaps depends only on the number of counterparties that are seeking or are willing to enter into a swap transaction at any given time Since there is no underlying government bond there can be no effect of market technical factors that may result in the yield for a government bond issue being less than its true yield The credit risk as reflected in the swaps curve are similar and make comparisons across countries more meaningful than government yield curves There are more maturity points available to construct a swap curve than a government bond yield curve More specifically what is quoted in the swap market are swap rates for 2 3 4 5 6 7 8 9 10 15 and 30 year maturities Reason 1 Reason 2 Reason 3 Reason 4 53 d 13 华章仁达华章仁达 Pure Expectation Theory Forward rates are solely a function of expected future spot rates i e long term interest rates equal the mean of future expected short term rates Drawbacks It neglects the risks inherent in investing in bonds Price Risk reinvestment Risk Broadest interpretation didn t give explanation but local interpretation explains that return will be same over a short term investment horizon starting today if forward rates realized Forward Rates can be viewed as Break even Rates Lock in Rates Market consensus of future rates Theory of Term Structure Pure Expectation 53 e 14 华章仁达华章仁达 Theory of Term Structure Liquidity and preferred Habitat Liquidity Theory Preferred Habitat Theory Forward rates are reflecting investors expectations of future spot rates plus a liquidity premium This liquidity premium is positively related with maturity Implication If yield curve is upward sloping short term rates are expected to rise OR rates are expected to remain constant or even fall but the addition of the liquidity premium results in a positive slope Forward rates are reflecting investors expectations of future spot rates plus a premium This premium is not directly linked to liquidity The premium is a compensation for lenders or borrower to move out of their preferred habitats the premiums are related to supply and demand at various maturities The premium is a positive or negative risk premium related to supply and demand for funds at various maturities not necessarily a liquidity premium The risk premium is not necessarily related to maturity Implication This theory can explain any kinds of yield curve shape 53 e 15 华章仁达华章仁达 53 f Key Duration Yield Curve Risk Key duration and Duration for a portfolio 16 华章仁达华章仁达 Yield Volatility Historical Volatility calculation 53 g Annualized Standard Deviation 17 华章仁达华章仁达 Implied yield volatility is the yield volatility that when used as input into the option pricing model would produce the observed option price Forecasting Volatility using historical data Moving average Zero value for expected changes thus Giving different weight Implied Volatility and Forecasting 53 g 18 华章仁达华章仁达 Bond Valuation Overview Spread measure BenchmarkReflects compensation for NominalTreasury yield curveCredit risk liquidity risk option risk Z spreadTreasury spot rate curveCredit risk liquidity risk option risk OASTreasury spot rate curveCredit risk liquidity risk 54 ab NominalSector yield curveCredit risk liquidity risk option risk Z spreadSector spot rate curveCredit risk liquidity risk option risk OASSector spot rate curveCredit risk liquidity risk NominalIssuer yield curveliquidity risk option risk Z spreadIssuer spot rate curveliquidity risk option risk OASIssuer spot rate curveliquidity risk Sector yield curve Issuer yield curve 19 华章仁达华章仁达 Practice BenchmarkAA corporate bond sector Nominal Spread110 bps Z spread100 bps OAS80 bps BenchmarkBMW issuer curve Nominal Spread30 bps Z spread20 bps OAS 25 bps Bond A option free Bond A Overvalued Undervalued Bond A Bond A embedded option Overvalued Undervalued Similar credit Bond B is 90 bps nominal spread over AA corporate bond benchmark 54 ab 20 华章仁达华章仁达 Binomial Tree 100 4 2 100 4 2 100 4 2 Price 3 5000 VH 4 2 rH VL 4 2 rL Formula Assuming 10 volatility Formula 54 c 21 华章仁达华章仁达 Valuing a Bond with an Embedded Option Assuming 10 volatility Callable Bond 54 d 22 华章仁达华章仁达 V call option V option free bond V callable bond Determining the Call Option Value V callable bond V option free bond V call option V Putable bond V option free bondV put option 54 ef Volatility increases option value increase bond embedded with option will decline in value 23 华章仁达华章仁达 Binominal tree with 35bps OAS added Assuming 10 volatility OAS Analysis The option adjusted spread is the constant spread that when added to all the 1 year rates on the binomial interest rate tree that will make the arbitrage free value i e the value produced by the binomial model equal to the market price 54 g 24 华章仁达华章仁达 Effective Duration Convexity Negative Convexity 54 h 25 华章仁达华章仁达 54 i Valuing a Putable Bond 26 华章仁达华章仁达 Analysis of CBs Traditional Approach The minimum price of a convertible security is the greater of 1 Its conversion value or 2 a plain vanilla security this value is called its straight value or investment value conversion value market price of common stock conversion ratio 54 j Market conversion price Market price of convertible security Conversion Ratio The market conversion price is a useful benchmark because once the actual market price of the stock rises above the market conversion price any further stock price increase is certain to increase the value of the convertible bond by at least the same percentage The market conversion price can be viewed as a break even price 27 华章仁达华章仁达 Analysis of CBs Traditional Approach Market conversion Premium Per Share Ratio Market conversion Premium per share Market conversion price Current market Price Market conversion premium per share Market conversion premium ratio Market price of common stock The straight value therefore acts as a floor for the convertible security s price However it is a moving floor as the straight value will change with changes in interest rates or if the issuer s credit quality changes 54 j 28 华章仁达华章仁达 Analysis of CBs Traditional Approach Downside Risk of a convertible bond The higher the premium over straight value the less attractive the convertible bond Market price of convertible bond Premium over Straight value 1 Straight value 54 j Upside underlying stock s prospects Investment characteristics Depending on the common stock price Fixed income equivalent or a busted convertible vs a common stock equivalent Hybrid securities in between 29 华章仁达华章仁达 Analysis of CBs An Option based Approach V CB V straight bondV call option of a stock V CB V straight bondV call option of a stock V call option of a bond Noncallable Convertible Bond Callable Convertible Bond Callable and putable Convertible Bond V put option of a bond 54 jk Advantage reduction in downside risk by floor of straight value Disadvantage a premium to be paid 30 华章仁达华章仁达 MBS Overview Mortgage Residential Mortgage Commercial Mortgage Agency MBS Ginnie Mae Fannie Mae Freddie Mac Non agency MBS thrifts commercial banks private conduits Passthrough CMO Stripped 55 a 31 华章仁达华章仁达 Mortgage Loan A mortgage is a loan secured by the collateral of some specified real estate property which obliges the borrower to make a predetermined series of payments The mortgage gives the lender the right to foreclose on the loan if the borrower defaults and to seize the property in order to ensure that the debt is paid off The interest rate on the mortgage loan is called the mortgage rate or contract rate Most common mortgage design is fixed rate level payment fully amortized 55 a Prepayment A payment made in excess of the monthly mortgage payment 32 华章仁达华章仁达 Mortgage Pass through Securities LOAN 1LOAN n Conforming Loan 55 b 33 华章仁达华章仁达 Measuring the Prepayment Rate Single Monthly Mortality Rate SMM 55 cd Conditional Prepayment Rate CPR PSA Prepayment Benchmark PSA 34 华章仁达华章仁达 Average Life The average life of a passthrough depends on the prepayment assmption 55 e 35 华章仁达华章仁达 Prepayment Prepayment Prevailing Mortgage Rate not only the spread but also the path Housing Turnover Economy personal income workers move 1 2 Characteristics of the underlying loans Locations age of the loan 3 55 f Contraction Risk Life shortened due to quicker prepayment Price potential is compressed Cash would be reinvested at a lower rate Extension Risk Life extended due to slower prepayment Investor can not get cash earlier to benefit from higher rate 36 华章仁达华章仁达 Collateralized Mortgage Obligation CMO The most fundamental form of structuring is time tranching which creates a series of bonds with different average lives and durations from either a collateral group or a preexisting parent bond Basically principal cash flows are allocated sequentially to a series of tranches All principal payments are directed to the shortest maturity bond until it is fully amortized Principal is then directed to the second bond until it is fully amortized and so on until the principal source is fully amortized 55 g 37 华章仁达华章仁达 CMO Sequential Pay Tranches Payment rules 1 Interest Payment Disburse periodic coupon interest to each tranche on the basis of the amount of principal outstanding at the beginning of the period 2 Principal Payment Disburse principal payments to tranche A until it is completely paid off After tranche A is completely paid off disburse principal payments to tranche B until it is completely paid off After tranche B is completely paid off disburse principal payments to tranche C until it is completely paid off After tranche C is completely paid off disburse principal payments to tranche D until it is completely paid off 55 h The higher the prepayment speed the shorter the average Life Protecting the shorter term tranche A from extension risk The protection come from the three other tranches C and D has protection against contraction risk coming from tranche A and B 38 华章仁达华章仁达 CMO Accrual Tranches Z bond Payment rules 1 Interest Payment Disburse monthly coupon interest to tranches A B and C For tranche Z accrue the interest based on the principal plus accrued interest in the previous month The interest for tranche Z is to be paid to the earlier tranches as a principal pay down 2 Principal payments Disburse principal payments to tranche A until it is completely paid off After tranche A is completely paid off disburse principal payments to tranche B until it is completely paid off After tranche B is completely paid off disburse principal payments to tranche C until it is completely paid off After tranche C is completely paid off disburse principal payments to tranche Z until the original principal balance plus accrued interest is completely paid off 55 h The reason for the shortening of the non accrual tranches is that the interest that would be paid to the accrual tranche is being allocated to the other tranches 39 华章仁达华章仁达 Planned Amortization Class Tranches PAC Payment rules 1 Interest Payment Disburse monthly coupon interest to each tranche on the basis of the amount of principal outstanding for each tranche at the beginning of the month 2 Principal payments Disburse principal payments to tranche P based on its schedule of principal repayments Tranche P has priority with respect to current and future principal payments to satisfy the schedule Any excess principal payments in a month over the amount necessary to satisfy the schedule for tranche P are paid to tranche S When tranche S is completely paid off all principal payments are to be made to tranche P regardless of the schedule 55 h 40 华章仁达华章仁达 Support Tranches The support tranches can be thought of as bodyguards for the PAC bondholders When the bullets fly i e prepayments occur it is the bodyguards that get killed off first The bodyguards are there to absorb the bullets Once all the bodyguards are killed off i e the support tranches paid off with faster than expected prepayments the PAC tranches must fend for themselves they are exposed to all the bullets A PAC tranche in which all the support tranches have been paid off is called a busted PAC or broken PAC Support Tranche has the greatest prepayment risk both extension and contraction risk The certainty of PAC bond cash flow comes at the expense of increased risk to the support tranches 55 h i 41 华章仁达华章仁达 Stripped MBS Principal Only Class PO Purchased at a substantial discount from par value The return depends on the repayment speed PO price will increase when mortgage rates decline Interest Only Class IO No par value The return depends on the repayment speed IO investor wants the prepayment to be slow 55 j Both POs and IOs exhibit substantial price volatility when mortgage rates change The greater price volatility of the IO and PO compared to the passthrough from which they were created is due to the fact that the combined price volatility of the IO and PO must be equal to the price volatility of the passthrough 42 华章仁达华章仁达 Non agency v s Agency Issued by Private entities Backed by nonconforming loan e g Loan to value including some 2nd mortgage loans manufactured housing loan or other commercial real estate loans CMOs are created from Pools of