The objective of this course is to undertake a rigorous study of fixed income securities. The course is quantitatively oriented and requires some background in calculus and statistics.
A wide variety of fixed income securities will be discussed. The course will begin with pure discount, default-free, government bonds. As the semester progresses, we will analyse coupon bonds, callable bonds, putable bonds, and floating rate notes.
We will also talk about some closely related financial instruments. These include forwards and futures on fixed income securities, bond options, options on bond futures, caps, floors, collars, swaps, swaptions and interest-rate exotics. Valuation of fixed income securities as well as interest risk management requires a deep understanding of these important financial claims.
In addition to analysing specific types of fixed income securities, we will study some tools that are useful in bond portfolio management. These include construction of discount functions (or yield curves), horizon analysis, immunization and duration/convexity matching for hedging, and models for pricing a variety of fixed income securities.
While the perspective of this course is from the viewpoint of a bond investor, a person in corporate finance needs to understand similar material. Evaluating an investment in a fixed income security is the mirror image of the problem faced by a corporation in deciding whether or not to issue a bond.