Fixed income - corporate bonds and high yield - UBS guest lecturer

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From the course by University of Geneva

Understanding Financial Markets

2241 ratings

University of Geneva

Understanding Financial Markets

2241 ratings

Course 1 of 5 in the Specialization Investment Management

In this course, you will learn what the main financial markets and their characteristics are as well as how they are linked to the economy. Our very diversified team of experts will start by teaching you how the price of stocks and bonds are computed and why they move while you will become increasingly aware of the notion of risk and why it matters when measuring an investment's performance. The focus will then move to less popular markets such as gold, emerging markets, real estate, hedge funds and private markets. These will be analyzed with an emphasis on their particular risks and return opportunities as well as how they can help in building efficient portfolios. Finally, the policies of central banks and their impact on financial markets will be presented to you along with the link between the economy and the price of financial assets. All along these different steps, experts from UBS, our corporate partner, will show you how the concepts you just acquired are effectively applied in a leading global bank. This focus on practicality means you will not only understand what is going on in global financial markets but also start to figure out how you can use them to achieve financial goals, be it a client's or your own. Course Director and main teaching contributor: Dr. Michel Girardin, Lecturer in Macro-Finance, University of Geneva

From the lesson

Major Financial Markets

Fixed income - government bonds: merits - Part 17:52

Fixed income - government bonds: merits - Part 25:55

Fixed income - government bonds: merits - Part 38:56

Fixed income - government bonds: risks11:21

Fixed income - corporate bonds and high yield - UBS guest lecturer5:26

Money markets - UBS guest lecturer6:58

Currencies: a separate asset class?11:57

What is the real value of a currency?17:40

Meet the Instructors

University of Geneva- Ines Chaieb
SFI Associate Professor of Finance
Geneva Finance Research Institute
University of Geneva- Jonas Demaurex
Teaching Assistant
Geneva Finance Research Institute
University of Geneva- Rajna Gibson Brandon
SFI Senior Chaired Professor of Finance and Managing Director of the GFRI
Geneva Finance Research Institute
University of Geneva- Michel Girardin
Lecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
Geneva Finance Research Institute
University of Geneva- Martin Hoesli
Professor of Real estate investments
Geneva Finance Research Institute
University of Geneva- Olivier Scaillet
SFI Senior Chaired Professor of Finance and Vice-dean (research) at GSEM
Geneva Finance Research Institute
University of Geneva- Philip Valta
SFI Assistant Professor of Finance
Geneva Finance Research Institute
Dirk Effenberger
UBS Guest Lecturer, Head CIO Cross-Regional Investment Office
Chief Investment Office, UBS Wealth Management
Mark Haefele
UBS Guest Lecturer, Global Chief Investment Officer
Wealth Management and Wealth Management Americas
Brian Nick
UBS Guest Lecturer, Strategist
Chief Investment Office, UBS Wealth Management Americas
Mike Ryan
UBS Guest Lecturer, Chief Investment Strategist
Chief Investment Office, UBS Wealth Management Americas
Simon Smiles
UBS Guest Lecturer, Chief Investment Officer UHNW
Chief Investment Office, UBS Wealth Management
Themis Themistocleous
UBS Guest Lecturer, Head European Investment Office
Chief Investment Office, UBS Wealth Management
Thomas Wacker
UBS Guest Lecturer, Head CIO Credit
Chief Investment Office, UBS Wealth Management
Chris Wright
UBS Guest Lecturer, Cross-Asset Strategist
Chief Investment Office, UBS Wealth Management
University of Geneva- Tony Berrada
SFI Associate Professor of Finance
Geneva Finance Research Institute

[MUSIC]

Hi, I'm Thomas Wacker.

I'm leading the Credit Research Department at the Chief Investment Office at UBS.

In this session we're going to talk about investing in bonds.

Global debt markets are actually about three times as large

as the global stock market.

That gives investors plenty of choice.

The largest part of the debt market is in the form of bonds

issued by governments and companies.

There are various kinds of bond structures and

bond types and there is virtually no year without an innovation in this market.

The vast majority of bonds, however, has a fairly simple structure.

It is a fixed term until you get the principal back, and it has a fixed

interest payment, which we call a coupon, that you receive periodically.

Bonds are usually issued and redeemed at 100% of their face value.

In this case, the yield is the same as the coupon.

But the fair yield for a bond can change during its life, and so does its price.

The yield should basically compensate you for two things.

A loss of purchasing power, as you lend your money out for quite a while, and

the risk that you don't get it back.

The expected loss of purchasing power of money,

that's a key driver of what we call risk-free interest rates.

Usually, we look at a reference issue, for what is called the risk-free rate.

So like use treasuries for the dollar market.

Or German bonds for the Euros.

The key risk, that a bond investor needs to consider, Is that the issuer,

whether a company or a government, will be unable or unwilling to pay its debt.

The most common reference point for this risk are credit ratings.

As they are provided by agencies, like Standard and Poor's, Moody's, or Fitch.

Of course, unexpected developments can always turn

what we thought was a good credit, into a bad one.

But at least historical evidence suggests that issuers with high credit ratings

have defaulted on their debt in much less cases than lower rated ones.

The difficult part now is judging the appropriate additional reward.

That an investor should demand for investing into a higher risk issuer.

This compensation varies and

it is often driven by similar factors that also move the stock market.

A positive outlook for the economy usually results in lower bond risk premiums.

Other drivers can have opposite effects on stocks and bonds.

For example M and A transactions or share re-purchases.

They're often good for the stock, but they're bad for

the bonds, so if we put pieces together again,

the risk-free interest rate plus the risk premium, that's the yield of a Bond.

Now let's get back to what is the worst case for you as a bond holder.

And it's a default by the issuer.

It will then stop paying interest and it either tries to negotiate

some partial depth forgiveness with its bond holders or it goes into liquidation.

For governments, liquidation is clearly no option.

So, they will always negotiate with bond holders.

Which can go on for several years, like examples of Argentina which

defaulted in 2004 and it still has pending lawsuits with its bond owners.

On average, investors only recover about 30% of the nominal value

if a company defaults and

they may need to wait years to receive payments in case of liquidation.

For Lehman brothers which was the big headline default

of the financial crisis 2008.

Liquidation is still on going today.

But investing in lower quality credit, you need to be very careful not only one

selecting in the issue but even more when finding the right instrument.

Companies offering issue different types of bonds, and in some cases,

reading the bond prospectus is really the only way to

find out about instrument-specific risks and special features.

Trading bonds is also quite different from trading stocks.

Bonds are often not traded on exchanges, but between broker dealers.

Which makes it harder for a private investor

to observe a price level at which a bond can effectively be bought or sold.

Many institutional investors buy bonds at the time when they're issued, and

they keep them until the final maturity date.

So there can be almost no secondary market transactions in some of the bonds,

which obviously makes it very difficult to liquidate a position

ahead of its redemption.

So as a consequence, if you are holding a lower quality bond

it is even more risky if this bond is also a liquid.

Bond markets may not always be perfectly efficient but

my number one investment advice for

you is to be most suspicious when a bounty of looks excessively attractive.

There's almost always a good reason for this.

You can earn an extra yield, if you pick the right bonds but

you are clearly not paid for being a hero in bond markets.

[MUSIC]

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