Bonds and Fixed Income training

Training Materials
Nov 2023 version
Paci Wu
Internal Only

Training Materials
Table of Content
• Introduction (slide 3-6)

• Bond (slide 7-27)

• Appendix (slide 28-32)

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Why should I learn about Bonds and Fixed Income?

• US FED Interest Rate is a global topic and it has direct impact to the bond
market and bond prices, even stock market

• Most high network individuals have exposure to bonds or bond funds

• Most people have bought bond funds from retail banks or through their
Mandatory Provident Fund.

• Bonds are very relevant to our clients even if the clients have NOT
bought bonds or bond funds through us.

• We should have a good understanding of US Interest Rate and bond

market to be relevant to our clients.

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Why everyone talks about rate hike all over this 2 years?

• The Fed rate is actually the rate at which banks borrow and lend among with the Fed
reserve. FOMC implicitly adjusts the rate by controlling the money supply

• A rate range was determined after each FOMC meeting, such as the current 5.25%-
5.5%.

• The upper target 5.5% is actually the Fed's discount rate when it act as the last
lender.

• The lower target 5.25% is the interest rate that the depository institutions incur when
the Fed stores reserves. This lower target rate influences the overnight reverse
repurchase offering rate and US short-term treasury yield. Changes in the costs of
funds are also progressively reflected in discount rate of commercial paper, mortgage
rate, corporate loans, and so on

• Is long-end treasury yield under control of the Fed?

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Why should I learn about Bonds and Fixed Income?

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Benchmark

• US treasury yield (https://www.ustreasuryyieldcurve.com/)

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Bond Basics – What are Bonds?
• A debt instrument issued for a period of more than one year with the
purpose of raising capital by borrowing.

• Generally, a bond is a promise to repay the principal along with

interest (coupons) on a specified date (maturity).

Source: Investopedia

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Why invest in bonds?

• Earn yield. Bonds is an interest baring or interest rate sensitive instrument

with credit exposure.

• Bond prices drop as interest rates go up

• Clients can buy bonds with 3-10y tenor to lock in the yield to maturity

• An instrument for longer term money management.

• Money managers use bank deposit, certificate of deposit, medium term notes

• A must use tool for Treasury and cash management and used by:
• Banks, insurance companies, securities houses, fund managers
• Corporates, family offices

• Sovereign debt for cash management and local currency access

• Institutions use bonds to trade credit. Credit Spread and credit default swap for
return or hedge against their corporate exposure

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Why invest in bonds?

• Where does yield come from?

• Superficial explanation: coupon + price discount

• Profound explanation ： benchmark + risk premium of the specific

issuer.

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Why invest in bonds?

• Yield to maturity

• Yield to maturity vs yield to worst (convention)

• Investment value (compare with benchmark)

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Bond Characteristic: Credit rating

• IG vs HY

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Key items of bonds

• Utradebond. com

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Key items of bonds

• Eligible bond list

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Bond Characteristic: Credit rating

• Issuer credit rating vs bond credit rating

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Prospectus

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Prospectus

• Summary of the offering including:

• Issuer
• Securities offered
• Issue date
• Interest
• Interest payment
• Maturity date
• Optional redemption
…..

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Typical sec description of a bond

(Source: Bloomberg)
• Compared with
https://www.bondsupermart.com/bsm/bond-factsheet/XS1785422731

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Risk Factors
Risk Factor Description
Interest Rate As rates increase, bond prices decline and vice versa. Rate sensitivity is
determined by maturity, coupon rate, embedded options.
Call/Prepayment Inability to achieve yield to maturity.
Reinvestment Reinvestment of proceeds at lower rates in an environment declining rates.
Yield Curve Interest rate sensitivity based on a parallel shift in yield curve not matching actual
yield curve movement.
Credit Default risk, widening credit spreads, downgrade risk.
Liquidity Widening of bid-ask spread.
Exchange-Rate Receiving less in domestic currency for a foreign currency denominated security.

Volatility For bonds with embedded options, higher expected volatility implies high option
values.
Inflation The decline in value of securities cash flow due to inflation, which is measured in
terms of purchasing power.
Event 1) Natural Disasters or Industrial Accidents, 2) Corporate Takeovers/Restructurings,
3) Regulatory Risk

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Bond Terminology

• Notional amount (or notional principal amount or notional value):

• The nominal or face amount that is used to calculate payments made on that
instrument.
• Price:
• A percentage measurement. Price of 100 = “100% of notional amount”.
Similarly, price of 88.65 = “88.65% of notional amount”

• Accrued Interest:
• For bonds, interest is calculated and paid in set intervals. Accrued Interest is
the interest that has accumulated since the principal investment, or since the
previous interest payment. When a a bond is sold between interest payment
dates, the seller is eligible to some fraction of the coupon amount

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Bond Terminology (continued)
• Day count convention – This determines the number of days between two coupon
payments and how interest accrues over time. The day count is also used to
quantify periods of time when discounting a cash-flow to its present value.

• 30/360 – This assumes 30 days in a month and 360 days in a year. This
convention is commonly used for US corporate bonds and many US agency
issues.

• Actual/365 – Based on actual calendar day count and assuming 365 days a year
(even in leap years). It ensures that all days in a coupon period are valued equally.
However, the coupon periods themselves may be of different lengths; in the case
of semi-annual payment on a 365 day year, one period can be 182 days and the
other 183 days. This convention is commonly used for US treasuries, in Europe
and Asia.

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Bond Characteristics

Source: Investopedia

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Priority

• Secured debt – type of corporate bond that has some

form of collateral, which is pledged to ensure that there is
payment of the debt.

• Senior/unsubordinated – debt that takes priority over

other unsecured or otherwise more "junior" debt owed by
the issuer.

• Junior/subordinated – debt which ranks after other debts

should a company fall into liquidation or bankruptcy.

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Priority & capital rank of Banks

• https://www.bondsupermart.com/bsm/bond-factsheet/US404280DE63
HSBC4.180% 09Dec2025 Senior Unsecured
• https://www.bondsupermart.com/bsm/bond-factsheet/US404280AP48 HSBC 4.250%
14Mar2024, subordinated, Tier 2
• https://www.bondsupermart.com/bsm/bond-factsheet/US404280AS86 HSBC 6.375%
Perp, Junior Subordinated AT1
• Attention: all have Agreement with Respect to the Exercise of UK Bail-in Power

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Coupon Structures

• Fixed Coupon – Fixed coupons over a fixed schedule.

• Zero Coupon – No coupons to the holder and are issued at a discount.

• Floater/Inverse Floater – Coupons that reset at predetermined times.

The rate is usually based on an index or benchmark with some sort of
spread added or subtracted to the benchmark.

• Caps/floors – States the maximum/minimum coupon.

• Step-up feature – Coupons increase or "step-up" at a stated date.

• Deferred coupon – Coupons which only start paying after a stated date.

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Redemption Features

• Call option – Allows the issuer the right to redeem the bonds on a
stated date or a schedule of dates before the stated maturity date for
the bonds arrives.

• Put option – Allows the bondholder to sell the bond or "put" the bond
back to the issuer at a certain price and date(s) before its maturity.

• Convertible – Allows the bondholders to exchange their current bond

with equity in the same firm using convertible bonds.

• Maturity – Notwithstanding the above, an issuer is obliged to redeem its

bond upon maturity.

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What if bond defaults?
• Evergrande: no money, just talk

• CFLD: Not so fortunate

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Bondholder’s Rights

• In the event of bankruptcy, an issuer may undergo liquidation or have

a reorganization.

• Bondholders get paid before equity holders in a liquidation and are first
in line to receive new securities, cash or a mixture or both should a
reorganization occur.

• Within the bondholders group, bondholders with more seniority will

receive their money before the more junior holders.

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Where to find out about bonds?

• We have a 3 layers approach to serve our sales and clients:

• Top down macro view from our Investment Committee and published through our Weath
Monthly
• This drives our Product Ideas that are published through our products specific publications
• Our Products team and Specialists work with our Sales to serve our clients.

• Call our Product team

• Fixed Income Monthly

• Utradebond.com

• Occasionally bond idea(next page)

• Other information source

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Where to find out about bonds?

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Appendix

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Bonds – Sales Cheat Sheet: Determining Bond Suitability

1) Client’s yield expectation

2) Currency denomination

3) Liquidity – When does the client need the funds?

4) Risk tolerance

5) Other preference (banks/non-banks, PI/non-PI, China/non-China)

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Bond matrix for different types of investors

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Internal resource

• Credit report

• JPM credit research (everyday, sent by Product team)

• BCA- EM Strategy (Sent by UOBKH Research)

• Alpine Macro-Global Fixed Income& Currency Strategy(Sent by UBKH Research)

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External websites

• https://www.cnbc.com/world/

• https://www.bondsupermart.com/bsm/

• https://bondblox.com/ (need subscription, but can get free mail)

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Disclaimer

• The information in this presentation has been prepared solely for

informational purposes and training.
• It is not an offer, recommendation or solicitation to buy or sell, nor is
it an official confirmation of terms. It is based on information from
sources believed to be reliable.
• No representation is made to its accuracy or completeness or that
any returns indicated will be achieved. There may be some
assumptions used in this presentation. Changes to assumptions
may have a material impact on any returns details. Information,
prices and availability are subject to change without notice.

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