INTERNATIONAL FIXED INCOME
NEW YORK UNIVERSITY, STERN SCHOOL
Professor Matthew Richardson
Office: 9-14 Tisch Hall
Telephone: (212)998-0349
Fax: (212)995-4233
Webpage: http://www.stern.nyu.edu/~mrichar0/teaching.html
E-mail: mrichardson@stern.nyu.edu
Office Hours: Mon 2-4PM/Tues 3-4PM
(or by appointment)
Administrative Secretary:
Telephone: (212) 998-0343
Course Description
This course describes the important international fixed income securities and markets,
and in turn develops tools for valuing these securities and managing their interest rate
risk. Along with providing a detailed analysis of how to value and measure the risk of
fixed income securities in an international context (i.e., in the presence of exchange
rates), the course will emphasize a number of special topics. These topics include, among
others, (I) the theoretical and empirical relation between international term structures
(focusing on the U.S., Europe and Japan), (II) asset allocation in the international fixed
income arena, (III) the use and valuation of international-based derivatives, especially
interest rate and currency swaps, (IV) a detailed analysis of emerging market debt, and
(V) studies of exchange rate crises and their impact on the international bond market.
The study of fixed income securities is highly quantitative in nature. Students should be
comfortable with mathematics such as algebra, linear algebra and basic calculus, as well
as statistical concepts such as probability distributions, mean, variance, covariance, and
regression. A basic background in finance is required, such as the core course,
Foundations in Finance. Students will need to use a calculator that can raise a number to
an arbitrary power, and are expected to be very familiar with a spreadsheet package like
Excel (including, for example, its solver function). It is my experience that if students do
not satisfy this criteria, then they tend to struggle in the class.
It is not necessary that students have taken either fixed income (B40.3333) or
international (B40.3388) before taking this class. In fact, this course overlaps with each of
these courses around 25%. This course is most suitable for students who want either (I) a
strong background in international fixed income, or (II) some background in fixed income
and international (but don't want to take both courses).
Course Materials
The main course material is a collection of presentation slides which will be used in each
lecture. Hardcopies of these slides are available at the bookstore or more directly on my
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webpage (i.e., http://www.stern.nyu.edu/~mrichar0/teaching.html). Students should make
notes directly onto their hardcopy, and thus can spend more time listening and
participating in the lecture. A secondary course material is a collection of readings, which
provide additional discussion of the issues brought up during the lectures. These materials
will be handed out periodically during the semester.
Unfortunately, there are no good textbooks on international fixed income. Two books on
fixed income I recommend are:
Tuckman, Fixed Income Securities , Wiley, 1995, and
Sundaresan, Fixed Income Markets and Their Derivatives, South-Western, 1997.
With respect to international finance, I prefer the following books:
For those who wish to purchase these books, any large chain, such as Barnes and Noble,
will carry a copy of the book, or alternatively, they can be ordered over the internet at
Amazon.Com, among other sites. It is not necessary to purchase any of these books for
the class - the course materials are self-contained.
Course Requirements
Grades will be based mainly on exam scores: midterm (40%), and final (60%). Problem
sets will be graded on a check, check-plus, check-minus, or no credit basis. These
problem sets count for borderline cases, of which I expect 25% of the class will find
themselves in.
With respect to the exams, you are allowed one 8.5x11 inch page of notes for the midterm
and two 8.5x11 inch pages of notes for the final.
With respect to the problem sets, because the material in the course is analytical and new
concepts build on old ones, it will be essential to do the problem sets in order to follow
the lectures and succeed on the exams. In order to facilitate learning, I encourage students
to work together on these problem sets. Groups of students working together should
submit just one assignment. All students in the same group will get the same grade. I will
not accept late assignments even if a dog ate it. (Someone’s did a few years back).
On the next page, I provide a tentative schedule for the lectures in the class.
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TENTATIVE SCHEDULE OF LECTURES
Topic I: Introduction
Course overview and survey of major international fixed income markets. (January 19).
Topic II: Fixed Income Overview
This part of the course covers the valuation and interest rate sensitivity of fixed cash
flows, including an analysis of the discount function, no arbitrage valuation, important
concepts such as yield-to-maturity and forward rates, and the key risk measures, namely
duration and convexity. Along with applying these concepts to a portfolio of securities,
these tools are then used to show how to hedge the interest rate risk of securities with
fixed cash flows. The topic ends with a discussion of the valuation and risk of floating
rate securities. (January 24,26,31; February 2,7,9).
Topic III: The Basics of International Finance
This part of the course introduces exchange rate risk and determination to the world of
fixed income. Particular emphasis is placed on the relation between spot and forward
rates, a detailed discussion of the well-known international parity conditions, and a brief
history of the international monetary system, including fixed and floating-rate regimes.
(February 14,16,23,28).
Midterm Exam (In class: March 1) (Based on Materials Through February 16)
Topic IV: Empirical Factoids About International Fixed Income
This topic looks at the empirical relation between term structures internationally, and
documents (I) the factors that move bond prices, (II) the correlation structure across major
countries, and (III) the components of these movements. (March 6,8).
Topic V: The Pricing and Risks of Global Fixed Income Investing
This series of lectures works off the foundations laid in Topics I I- IV, and presents an
integrated approach to the valuation and risk analysis of international bonds. This analysis
includes a quantitative and theoretical analysis of international term structures and
considers the asset allocation decision across markets. (March 20,22,27).
Topic VI: Emerging Market Debt
This topic covers emerging market debt, with a special emphasis on so-called Brady
Bonds, that is, emerging market debt denominated in U.S. dollars. The analysis includes
both the valuation and risks of this debt, as well as an overview of the emerging markets
for debt securities. (March 29, April 3).
Topic VII: Financial Crisis and the International Bond Market
This series of lectures discusses the impact of global financial crises on the international
fixed income market. The first lecture will describe examples of recent economic crises
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and how the international bond market was affected. The last two lectures will look at
specific examples closely, with guest speaker Jaime Serra (who has been Minister of
Trade and Minister of Finance for Mexico during the 1994 Peso crisis) for one, and a
detailed analysis of Long term Capital Management for the other. (April 5,10,12).
Topic VII: International Fixed Income Derivatives
This topic covers an analysis of important products markets, including the ever important
interest-rate and currency swaps market. Of particular interest, we provide a detailed
description of this market, along with an analysis of the valuation and interest rate
sensitivity of swaps. Also described is the international repo market, as well as some
common exotic securities. (April 17, 19,24,26).
Topic IX: Course Review
An overview of the important concepts of the course. (May 1)
Final Exam
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