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Compared to the early 1980s when the fixed income market was comprised of bonds and simple structures, today the market is comprised of more complex bond structures with embedded options that make bond valuation more difficult. The markets for fixed income securities represent important business and investment opportunities for insurance companies, investment banks, other financial institutions and non-financial corporations.
With increased volatility of interest rates, investors must understand the techniques for valuing these securities and how other derivative securities in the markets can be used to manage interest rate risk of fixed income portfolios. The objective of this course will be to equip students with principles and tools which allow them to tackle realistic valuation of fixed income securities and risk management of bond portfolios.
TOPICS COVERED
Structure of fixed income markets the institutional framework of fixed income securities; - size markets; instruments traded; market conventions; financial innovation and bond market
Term structure of interest rates determinants of term structure of interest rates; spot - and forward rates; arbitrage restrictions on interest rates; yield curves
Bond Pricing
rates and conventional yields; zero-coupons; coupon-bearing bonds; - callable and non-callable bonds
Treasury and quasi government instruments treasury securities; stripped securities; - federal agency securities
Corporate debt instruments corporate bonds; medium term notes; commercial paper
Mortgages and mortgage passthrough securities fixed rate mortgage; mortgaged - passthrough securities; collateralized mortgage obligations
Risk management techniques duration and convexity; duration in hedging; limitations of - duration; immunization strategies
Bond investment and portfolio strategies price volatility; arbitrage strategies; zero-- coupon strategy; active portfolio strategies; dedicated portfolio strategy
CLASS FORMAT AND TEACHING METHODS
The course will follow a lecture/discussion format. The course shall make use of a number of applied exercises, problems and projects that require the application of financial information technology. Hence students are expected to have a basic familiarity with financial information technology and or other financial software before taking this course.
PRE-REQUISITES
6N:225 Managerial Finance
