# GRA 6539 Fixed Income Securities

## GRA 6539 Fixed Income Securities

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, with fixed coupon payments. As long as the government can be trusted to avoid default, there is no cash-flow uncertainty for 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", both "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.

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.

1. The students will use and/or develop certain quantitative skills, e.g, will learn to utilize Excel and/or Matlab 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.

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

The following list 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: Forwards and swaps; Options and futures
- Institutional details and Tools: Central Banks, Inflation, Monetary Policy
- Tools: Term Structure of Interest Rates in discrete time
- Tools: Binomial trees (term structure and pricing, European and American options, Monte Carlo simulation)
- Credit risk: an overview.
- Structured products: CDS, ABS

Additional topics may be covered as time permits, including:

- Agency debt market
- Institutional details and Tools: Corporate debt and fixed income options

Quantitative methods applied within the context of the course include:

- Probability distributions (discrete and continuous)
- Regression analysis (time series and cross section, hypothesis testing)
- Binomial trees and Monte Carlo simulation

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 during lectures.

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.

This is a course with continuous assessment (several exam components) and one final exam code. Each exam component is graded by using points on a scale from 0-100. The components will be weighted together according to the information in the course description in order to calculate the final letter grade for the examination code (course). Students who fail to participate in one/some/all exam elements will get a lower grade or may fail the course. You will find detailed information about the point system and the cut off points with reference to the letter grades when the course start.

At resit, all exam components must, as a main rule, be retaken during next scheduled course.

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 specific prerequisites and will assume that students have followed normal study progression. For double degree and exchange students, please note that equivalent courses are accepted.

Assessments |
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Exam category: Activity Form of assessment: Class participation Weight: 10 Grouping: Individual Duration: 1 Semester(s) Exam code: GRA65391 Grading scale: Point scale leading to ECTS letter grade Resit: All components must, as a main rule, be retaken during next scheduled course |

Exam category: Submission Form of assessment: Written submission Weight: 25 Grouping: Group/Individual (1 - 2) Duration: 24 Hour(s) Comment: Take-home examination Exam code: GRA65391 Grading scale: Point scale leading to ECTS letter grade Resit: All components must, as a main rule, be retaken during next scheduled course |

Exam category: Submission Form of assessment: Written submission Invigilation Weight: 65 Grouping: Individual Support materials: - All printed and handwritten support materials
- BI-approved exam calculator
- Simple calculator
- Bilingual dictionary
Duration: 3 Hour(s) Comment: Written examination under supervision. Exam code: GRA65391 Grading scale: Point scale leading to ECTS letter grade Resit: All components must, as a main rule, be retaken during next scheduled course |

A course of 1 ECTS credit corresponds to a workload of 26-30 hours. Therefore a course of 6 ECTS credits corresponds to a workload of at least 160 hours.