Fixed Income Course Description

This course is designed to provide the student with an understanding of the valuation and risk management concepts in the fixed income markets. A variety of fixed income securities will be discussed. These include pure discount bonds, coupon bonds, callable bonds and home mortgages. We will also talk about some interest rate derivatives: forwards and futures on fixed income securities, bond options, caps, floors. In addition to analyzing specific types of fixed income securities we will study some tools that are useful in bond portfolio management. These include construction of discount function, duration and convexity measures for risk management and models for pricing a variety of fixed income securities.

Course Objectives

• To learn how to manage interest rate risk
• To learn how to value securities with cash flows that are sensitive to movements in interest rates

Course Outline

1)      Fixed-Income Markets (1 wk.)

a.      Organization and Conduct of Debt Markets

b.      Overview of Fixed Income securities

2)      Bond Prices, Discount Factors and Arbitrage (2 wk.)

a.       Spot and Forward Rates

b.       Yield to Maturity

c.       Trading Strategies

3)      Risk management (1wk.)

a.       Duration

b.       Convexity

4)      Theory of the Term Structure (1 wk.)

5)      Fixed Income Securities: Description and Pricing (4 wk.)

a.       Forwards and Futures

b.       Interest rate swaps

c.       Fixed Income Options

d.       Mortgage Backed Securities

e.       Catastrophe bonds

f.        Callable Bonds

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