Fixed income - government bonds: risks

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来自 University of Geneva 的课程

Understanding Financial Markets

2422 个评分

University of Geneva

Understanding Financial Markets

2422 个评分

课程 1（共 5 门，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

从本节课中

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

与讲师见面

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 again.

So we just saw in the previous video that government bonds have many merits.

After this video you will be able to identify the main risks which

there are in investing in bonds, and we will also give

you some highlights as to how to hedge against these risks.

But this will come in the later part of these courses.

There are five main risks in investing with government bonds.

The first is economical risk.

The second is political risk.

Then there is interest rate risk.

And we will make a link here with the previous video.

You remember the rule and the glasses and how they fell apart.

So we'll see how duration comes into play when we talk about interest rate risk.

Then there's inflation risk, and last but not least,

we're going to talk about currency risk.

So let's start with economical risk.

We said that governments are safe, in that normally, they do not default.

They're always able to pay back the debt

that they've issued in the form of government bonds.

But in some cases, Actually, they do default, and

there's been many historical examples of these defaults.

I told you that government bonds first came into existence in Greece.

Greece has been a country which has defaulted on its debt.

Including very recently.

Other examples include Latin American countries who regularly,

countries like Argentina, who have regularly defaulted on their debts.

So in principle, we may say that governments when they face difficulties,

ie they cannot finance all their expenditures,

they can actually raise taxes to collect more money,

more revenues to finance their expenditures.

The problem is that if they do that,

investors will demand a higher interest rate.

They will see that the government has difficulties, and so the next time they

come and they issue a bond, investor will be reluctant to invest in these bonds so

the government will have to come with higher interest rates.

So basically when we talk about economic

risk we're talking about the probability that the government will default.

This probability is low, but it's not zero.

So indeed, there is that risk.

Then there is the political risk.

It's related but

a bit different than the previous one, economic risk, economical risk.

Here the government will also kind of default, will not pay back its debt.

But here it's a political decision.

So in the first example, economical risk.

The government is unable to pay back the debt.

Here it is able but it is unwilling.

So we have a historical example of this.

For instance, Russia at the beginning of last century and also in 1998.

We had the so-called Russian Crisis.

And here it's a combination of economical and political risk,

in that the government devalued the currency, the Rouble.

It faces economic difficulty so

they said basically let's devalue the currency in an effort to boost exports and

revive growth in the economy and also they defaulted on the debt.

So here we do have also this risk that basically you don't

get your money back because the government refuses to give your money back.

Okay, the third risk that we're going to have a look at is interest rate risk.

Basically, we saw that there is this inverse relationship between

the interest rate, the yield, yield to maturity and the price of a bond.

We gave you the example and let's have a look at it again.

If you hold a bond and it's yielding 10%, and then suddenly a new bond comes

into existence about 12% we saw in the previous video how this would

depress the price of the bond yielding 10% basically so

that the yields match between the old bond and the new bonds.

So basically while interest may go up, the price of the bond comes down.

And now we can make the link with the famous concept of duration which we saw.

You remember this number of year which equlibrates all the cash flow.

All the revenues you get year after year investing in bonds and the principle.

You know the big bottle at the end.

Duration is a kind of point where all the cash flows and

the principle are in balance.

It's also a key concept because it measured the sensitivity of

the bond to movements in interest rates.

And this can be seen in the following formula.

So, we can see from this formula, and we wanted to illustrate with

this formula how the interest rate risk is captured by duration.

So we see it here that the percent changes in the price of an asset, such as a bond,

is actually equal to -D and

D stands for duration, times, and you see this formula in brackets,

delta R and delta R is the change in interest rates.

Divided by 1 + r, and that's where we're standing in terms of interest rates.

So this may look a bit complicated.

Apologies for this, but you will see how it's very clear.

We have a numerical example.

So let's assume that D, the duration, is 6.55, okay?

And let's assume further that we have a coupon rate of 10% and

the price of bond is at par at 100.

Now, let's assume that the interest rate, the yield,

which is 10%, goes from 10 to 12%.

So, how will this affect the bond price?

Well, we have the formula here so we substitute in there, D for 6.55.

Then the changes in interest rates, it goes from 10% to 12% so

it's an increase by 2%, 2 percentage points.

So it's actually 0.02, and it's divided by

the initial level of the interest rate, so that's 10%.

So it's 1 + 0.1, 1.1.

And all this boils down, translated into percentage, so

you multiply by 100 to get percentage changes, and you see that it's -11.91.

So actually it's a huge increase.

Can you believe it?

I mean interest rate goes from 10 to 12%, but

the price of your investment, how much your bond is worth,

it actually drops by almost 12%, duration is a key metric,

because here it measures the sensitivity of your bond to changes in interest rates.

We took the example here of 655, but let's assume that the bond duration was not 655,

but say ten, we would have had a bigger drop in the bond price.

So, duration is actually a key metric where you have to hedge against and

manage the interest rate risk of your bond or a bond portfolio.

Okay, so this was the first risk, we saw economical,

political risk, interest rate risk, now let's talk about inflation risk.

We have here this nice picture of your wallet being squeezed.

Being squeezed by what?

By purchasing power being lowered by the fact that when you get your

money back from the government, you get your capital, your principal, back.

If there's been lots of inflation in between, then your money is worth less.

So to illustrate this, let's assume that you bought a bond and

it gives you a coupon of $100 each year over ten years.

And then suddenly after three years we get an unexpected

price jump, unexpected increase in inflation, right?

Okay, so if a new bond comes into

existence it will reflect these conditions of higher inflation.

But you holding this old bond does not reflect this higher inflation.

Interest rates will have to go up to compensate for this higher inflation rate.

And so the value of your bond will go down, because the investors in the new

bond when they will look at you say, hey, but your $100 as coupon

is worth less because of inflation and so the price of your bond will fall.

In other words,

other investor will only accept to buy the bond if you give them a discount.

So it's basically the same kind of impact as when interest rates go up.

Here, it's inflation which goes up and decreases the real value of your bond.

Okay, now let's have a look at the last, but not least, risk.

This is currency risk.

We said, when we first talked about government bonds,

that these are issued by governments.

And traditionally, typically, they're issued in domestic currency.

but obviously these bonds are accessible to foreign investors.

So if I'm a Swiss investor, or French investor and

my base currency is euro or Swiss franc, and I buy a US dollar bond,

and if the dollar goes down versus the euro or the Swiss franc,

then when I get my money back, my principle,

I may have gained this regular stream of income year after year.

But when I get my money back and

the dollar has fallen in between, then I can make a loss.

And this could be quite substantial because currencies are actually,

can be actually quite volatile.

So for the moment we are just identify these risk,

we identified five of them, but it will be at a later

stage that we will show you how we can hedge against these risks.

So stay tuned.

[MUSIC]

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