Fixed Income Team Project
Today’s Date: 3/23/09
Project: Corporate Bond & Economic Analysis
Due Date: April 24th 2009
Project Value: 20 Points (20% of Final Grade)
Project overview: Your team will be assigned a public company for which you will evaluate
corporate bonds with maturities greater than 5 years from today. Your job is to select a bond
issued by that company that you believe will provide the best trading opportunity over the next
year. Besides having a maturity greater than 5 years, your selected bond must be a “bullet” style
bond (no embedded options), and have a credit rating between BBB and AAA according to
Bloomberg composite ratings (average rating between Moody’s, S&P, and Fitch). Support your
decision of which bond you wish to trade (buy or sell short) with economic reasoning and the
concepts we learned in class. Your final grade will be determined by the quality of your analysis
and presentation. Assume you are giving this analysis to the head trader on your desk in order to
promote the trade.
Project requirements: Note: The following should be evaluated and included in the project:
Bond analysis – Review at least two of the outstanding corporate bonds for an assigned company
to analyze for the head trader. This must be done based on bonds with a composite rating
between BBB and AAA and greater than 5 years until maturity. Select one of the bonds for
trading (take a long or short position) based on your expectations of rate movements. Provide all
expected cash flows for the bonds and total return calculations. Use Bloomberg to determine
duration and convexity of each of these bonds and briefly explain these concepts to your head
trader. Determine if your bond is posted on “TRACE” and if so provide the last trade reported.
Find the amount issued, the cusip number, the coupon rate, and the frequency of payment.
Provide a credit analysis for the corporate bond selected including an evaluation of covenants,
collateral, and ability to pay analysis as described in chapter 20 of your text. Support your
recommendation using your quantitative analysis and Macroeconomic analysis as per the data
below:
1. Overall economic outlook: What does the economy currently look like? Are we in an
expansion or recession? Where are we going from here? Get consensus forecasts for GDP
growth, employment, CPI, the fed funds rate, the 2 year treasury rate, and the ten year treasury
rate over the next year. Do you agree with these forecasts? What are the major risk factors
going forward that will determine the path of the economy? Where do you think these numbers
will be over the next year given your analysis of the current and future economic determinants?
This part of the paper will greatly influence your trading decision and the rest of your analysis.
2. Fed policy: What is the current fed policy? Are they worried about inflation or growth? Are
they tightening, loosening, or neutral? Where will they be in 1 year and why?
3. Yield curve (Arbitrage analysis): What does the current yield curve look like? Is it normal in
a historical context? How is it changing? What does it mean? What is happening to yield
spreads and what do you expect to happen going forward? Support your answers using theory
discussed in class. Provide analysis of actual data to support your answer. You must evaluate
your selected bond based on the criteria listed below and do a yield curve analysis to determine
the fair price and yield of your bond. Once this is done, determine the arbitrage possibility of
your bond relative to the yield curve consistent with your bond (buy your bond & sell the market
bond or vice versa). Calculate the current arbitrage profit in terms of yield and price.
4. Predictions: What will the yield on your bond be a year from now? What is the overall profit
expectation for the bond position you took in one year?
Format requirements:
Please keep your project between 10 and 15 pages double spaced including graphs/charts/tables
Please submit in hard copy, bound and due in class on 4/24/09.
Penalty points will be assessed for late submission.
Fixed Income Project Bloomberg Functions
Individual Company Bond Data:
TICKER US Equity RELS
 Corporate by Ticker (21)
 Sort by “Mty Typ” Bullet and “Cpn Typ” Fixed
DES – Description
 Coupon
 Payment Frequency
 CUSIP
 Ratings (Moody’s, S&P, Fitch, Composite)
 Amount Issued/Outstanding
 TRACE (3) - Last trade information
 Covenant/Defaults (8)
 Prospectus (11)
TRA – Total Return Analysis
YA – Yield Analysis
DURA – Duration
CVXA – Convexity
DDIS – Debt Distribution
Market Data:
PX1 – On-the-Run Treasury Yields
ECFC – Economic Forecasts
 Real GDP, CPI, Unemployment, Rates
 Annual or Quarterly
 Market Composite vs. Fed
FOMC – Federal Open Market Committee
 Historical Rates and Bias (24)
YCRV – Yield Curve
 F880-F885, AAA-BBB
 F82- US Treasuries
 Expand Graph, Page Down for Spread Graph and Data Table
Team Numbers and Company Assignments*
1)
2)
3)
4)
5)
6)
7)
8)
9)
CAT
UTX
DIS
KFT
WMT
BA
GE
ADM
DE
*Note – If you have difficulty finding any bonds meeting the criteria required, see me ASAP for
alternate stock selection or waiver of restrictions.
Student Team Assignments - See Separate File Posted on my Website