APPLIES TO ACADEMIC YEAR 2015/2016

GRA 6539 Fixed Income Securities

Responsible for the course
Barbara Bukhvalova

Department
Department of Financial Economics

Term
According to study plan

ECTS Credits
6

Language of instruction
English

Introduction
A fixed income security is a security for which the rule determining future cash flows is set, when the security is issued. The classical example of a fixed income security is a treasury bond, which offers fixed interest payments. As long as the government can be trusted to avoid default, there is no uncertainty about the future cash flows from the bond. That simplifies analysis of sovereign bonds: there is only one major source of uncertainty, future interest rates.

While pricing of some fixed-income instruments is simpler, it is never simple. This course and jobs in fixed income are some of the most technically demanding within finance. While learning about fixed income may seem dry at times, good understanding is paramount. Indeed, the fixed income market dwarfs the equity market. Knowledge of fixed income is in high demand in the job market.

Due to its complexity, detailed analysis of fixed income securities is often nearly omitted from academic programs. Yet fixed-income instruments (and their derivatives) form the majority of the capital markets in the developed economies. Importance of understanding fixed-income instruments by a wider audience of investors/households has been repeatedly brought to light in the recent years of financial turmoil.

The recent global crisis was brought about by troubles in the fixed-income markets. The words on everyone's tongue were `mortgages' and `mortgage-backed securities,' fixed-income instruments. More close to home, the Terra Securities scandal of 2007 has hopefully taught us, that investing in fixed-income instruments without proper analysis and knowledge is a bad idea.

Learning outcome
By the end of the course, the students will gain understanding of the major institutional characteristics and some key technical know-how of the design and the valuation of fixed-income instruments. To that end, in addition to understanding the economic intuition, the students will be expected to solve problems, which will go into the formal modeling issues, including interest rate modeling.

Acquired Knowledge includes:
1. Ability to identify the determinants of risk and return of debt securities. The emphasis is on pricing of fixed-income securities, including fixed income derivatives.
2. Fixed income portfolio management techniques
3. The role of fixed-income securities in risk management.

Acquired Skills include:
1. The students will use and/or develop certain quantitative skills, e.g, will learn to utilize Excel tools for solving simple but realistic problems that may arise in the fixed income market, will learn to apply binomial tree and Monte Carlo simulation approaches to asset valuation and risk assessment.
2. The students will also be able to explain interdependencies of risk factors

Reflection:
1. Students should gain a unified understanding of the interdependencies of factors affecting fixed income securities
2. Students should be able to analyze problems that go beyond those explicitly covered in class/the required book

Prerequisites
GRA 6543 Introduction to Asset Pricing or equivalent
All courses in the Masters programme will assume that students have fulfilled the admission requirements for the programme. In addition, courses in second, third and/or fourth semester can have spesific prerequisites and will assume that students have followed normal study progression. For double degree and exchange students, please note that equivalent courses are accepted.

Compulsory reading
Books:
Veronesi, Pietro. 2010. Fixed income securities : valuation, risk, and risk management. Wiley

Other:
During the course there may be hand-outs and other material on additional topics relevant for the course and the examination.
A list of compulsory readings will be provided on It's learning or in class.


Recommended reading
Books:
Benninga, Simon. 2014. Financial modeling. 4th ed. MIT Press
Cusatis, Patrick J., Martin Thomas. 2005. Hedging instruments and risk management. McGraw-Hill
Sengupta, Chandan. 2010. Financial analysis and modeling : using Excel and VBA. 2nd ed. Wiley
Sundaresan, Suresh. 2009. Fixed income markets and their derivatives. 3rd ed. Elsevier
Tuckman, Bruce, Angel Serrat. 2012. Fixed income securities : tools for today's market. 3rd ed. Wiley

Course outline
The following gives an overview of the key topics to be covered in the course. The required textbook is good in some aspects, but is not detailed enough in others. It will therefore be supplemented by a number of articles and/or teaching materials.

The following topics will be covered:
- Institutional details: An overview of debt securities markets
- Tools: Bond pricing and arbitrage
- Tools: Measures of price sensitivity: Duration and convexity
- Institutional details: bond auctions
- Tools: Term structure models
- Institutional details and Tools: The market for repurchase agreements
- Tools: Fixed income forwards and futures
- Institutional details: Eurodollar Futures Markets and interest rate swaps
- Tools: Interest rate swap spreads and their determinants
- Mortgage backed securities

Additional topics may be covered as time permits, including:
- Securitization
- Agency debt market
- Institutional details and Tools: Corporate debt and fixed income options

Computer-based tools


Learning process and workload
A course of 6 ECTS credits corresponds to a workload of 160-180 hours.

Students are expected to read the assigned chapters before class. Active class participation is expected during lectures, in the interactive regime.

There will be problem sets. The questions are to be answered by students prior to class and discussed together with the lecturer during classes.

Examples highlighting and demonstrating often-used, practical applications of fixed-income-securities' pricing are used extensively in the class.

There will be other written assignments during the semester. Those will be compulsory and graded as outlined below.

Please note that while attendance is not compulsory in all courses, it is the student’s own responsibility to obtain any information provided in class that is not included on the course homepage/Itslearning or textbook. Notice also that the course homepage and/or Itslearning are not designed for the purpose of accommodating the needs of students choosing not to attend classes.


Examination
The course grade will be based on the following activities and weights:
65% Final written examination (3 hours)
10% Class participation
25% Take-home examination

Class participation is an integral part of the successful progression in the course.
There will be a mandatory take-home mid-term exam, which can be worked on and submitted either individually or in pairs.