# GRA 6539 Fixed Income Securities

## GRA 6539 Fixed Income Securities

This course covers the use and valuation of fixed income securities, like sovereign and corporate bonds, and their derivatives. 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. In this context, there is only one major source of uncertainty, future interest rates.

The fixed income market is the biggest financial market in the world and includes many different types of debt instruments like pure discount bonds, floating rate notes, callable and puttable bonds, and other. The probability that the issuer will default complicates the analysis with the introduction of credit risk, which creates the division between investment grade and high yield bonds. Further, the liquidity is another risk that holders of such securities need to account for.

Derivatives allow market participants to trade interest rate and credit risk directly with the use of contracts like interest rate and credit default swaps. These, enlarge the options available to investors and corporations in relation to their risk-taking and risk-management activities.

A good understanding of fixed income instruments, their derivatives and markets is very important to financial professionals and very useful to a wider audience of investors and households. In addition, due to the magnitude of the market and the complexity of the instruments there exist many career opportunities in this sector of the financial industry.

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 and credit risk 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:

- An overview of debt securities markets and bond auctions
- Bond pricing and arbitrage
- Duration and convexity
- Interest rate derivatives
- Central Banks, Inflation, Monetary Policy
- Term Structure of Interest Rates in discrete time
- Fixed income pricing using Binomial models and Monte Carlo simulations.
- Credit risk modelling and bond pricing
- Structured products: CDS, ABS,CDO

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.

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 starts.

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.

Exam category | Weight | Invigilation | Duration | Support materials | Grouping | Comment exam |
---|---|---|---|---|---|---|

Exam category:Activity Form of assessment:Class participation Exam code:GRA65391 Grading scale:Point scale Grading rules:Internal examiner Resit:All components must, as a main rule, be retaken during next scheduled course | 10 | No | 1 Semester(s) | Individual | ||

Exam category:Submission Form of assessment:Written submission Exam code:GRA65391 Grading scale:Point scale Grading rules:Internal examiner Resit:All components must, as a main rule, be retaken during next scheduled course | 30 | No | 24 Hour(s) | Group/Individual (1 - 2) | Take-home examination | |

Exam category:Submission Form of assessment:Written submission Exam code:GRA65391 Grading scale:Point scale Grading rules:Internal and external examiner Resit:All components must, as a main rule, be retaken during next scheduled course | 60 | Yes | 3 Hour(s) | - All printed and handwritten support materials
- BI-approved exam calculator
- Simple calculator
- Bilingual dictionary
| Individual | Written examination under supervision. |

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.