Fixed Income Securities

Aims and Objectives

The objective of this course is to undertake a rigorous study of fixed income securities. The course is quantitatively oriented and requires some background in calculus and statistics. At the end of the term, my hope is that participants will be comfortable doing three things. First, how to manage interest rate risk. Second, how to value securities with cash flows that are sensitive to movements in interest rates. Third, how to determine the optimal exercise policy for a variety of embedded options in fixed income securities (e.g., when should a bond be called.).

While the perspective of this course is from the viewpoint of a bond investor or a bond trader, individuals working in corporate finance need to understand similar material. Evaluating an investment in a fixed income security is the mirror image of the problem faced by a corporation in deciding whether or not to issue a bond.

Topics Covered

The course will begin with pure discount, default-free, government bonds. As the term progresses, we will analyse coupon bonds, callable bonds, putable bonds, sinking fund provisions, and floating rate notes. We will also talk about some closely related financial instruments. These include forwards and futures on fixed income securities, bond options, options on bond futures, caps, floors, collars, swaps, swaptions, interest-rate exotics and defaultable bonds. Valuation of fixed income securities as well as interest risk management requires a deep understanding of these important financial claims.

In addition to analysing specific types of fixed income securities, we will study some tools that are useful in bond portfolio management. These include construction of discount functions (or yield curves), horizon analysis, immunization and duration matching for hedging, optimisation techniques for constructing bond portfolios, and models for pricing a variety of fixed income securities.

Who should attend?

This course is aimed at anyone who in their current or future careers will be exposed to the fixed income markets. This includes, but is not limited to, fixed income traders and sales personnel, fixed income portfolio managers and corporate treasurers.

Format & Teaching methods

Lectures.

Reading Materials

Course packet

Pre-requisites

Corporate Finance and Finance 2.

Assignments & Assessments