Fixed Income Management

For the summer term 2018, the following syllabus applies for the above named course:

Content

• Types of bond and risk factors
• Yield curves
• Bond valuation and management
• Interest rate derivatives

Outline

1. Introduction: Definitions, Risks associated with bonds
2. Pricing of bonds: Time value of money, Price-yield relationship, Price quotes, Accrued interest, Complications
3. Measuring yield: Nominal versus effective rates, Conventional yield measures, Potential sources of a bond’s return, Total return and horizon analysis
4. Bond price volatility: Price volatility characteristics, Measures of bond price volatility, Duration, Convexity
5. Factors affecting bond yields and the term structure of interest rates: Spreads, Yield curve, Spot rate curve, Zero bond curve, Forward curve, Expectations theories, Market segmentation theory, Swap rate curve
6. Bond markets: Government bonds, Corporate debt instruments
7. Interest rate models: Short rate models
8. Bond portfolio management: Management strategies, Active portfolio strategies, Bond portfolio construction, Liability driven strategies, Immunization
9. Derivatives on interest rates and fixed income instruments: Interest rate futures contracts, Interest rate options, Interest rate swaps, caps, and floors

Previous knowledge expected

As a prerequisite for the course, students should have a knowledge of finance that is equivalent to the contents of the master course “Capital Market Theory”, i.e. they should know about decision-making under certainty and uncertainty; portfolio theory; capital market models; valuation of forwards, futures, and options. Furthermore, they need to be familiar with elementary mathematics, i.e. arithmetic, solving linear equations, differentiating and integrating elementary functions, the log-function, and the exponential-function. They are expected to have a working knowledge of statistics, i.e. expectations, standard deviation, variance and covariance.

Objective (expected results of study and acquired competences)

The aim of the course Fixed Income Management is to allow students to develop the conceptual foundations and analytical skills to manage fixed income instruments and portfolios in asset management, treasury, risk management, banking, and insurance applications.

During the course, students will:

1. learn about the foundations of fixed income securities.
2. analyse various bond-specific investment styles and their prospects of success.
3. value bonds and bond portfolios.
4. calculate the risks involved in bonds.
5. weigh the anticipated return against the risk taken in order to ensure professional risk management.
6. compare portfolio management strategies.
7. work on practical exercises and case studies to discuss the knowledge and methods learned in class.

Teaching and learning method (delivery of skills) and workload for students

The course consists of a lecture and integrated exercise sessions.

The total workload of the course consists of 180 hours, of which 60 hours are class and 120 hours study time.

Assessment

At the end of the course there will be a 60 minutes exam (written or electronic).

Recommended Reading

The suggested textbooks for this course are:

• Fabozzi: Bond Markets, Analysis, and Strategies
• Tuckman, Serrat: Fixed Income Securities
• Veronesi: Fixed Income Securities

Materials

The course materials consist of slides, which are made available to the students via ILIAS before class, the slides with hand-written remarks which are made available to the students after class, the assignments, and solution sketches.