AD 495 – Special Topics: Fixed Income Securities Spring 2013 Instructor Cenk C. KARAHAN Class Meeting Time Mondays 11am-1pm Tuesdays 11am-12pm Course Overview An introduction to bonds and other debt instruments. Covers the models and techniques required to price and analyze fixed income securities and their derivatives. Includes the basic concepts of fixed income instruments, such as yield, duration, convexity; pricing traditional derivatives such as swaps and bond options; management of fixed income portfolios and hedging of associated risks. An elementary introduction to term structure of interest rates and credit risk modeling, and their use in valuation of derivative instruments. Required Text Classroom Fixed Income Securities: Valuation, Risk, and Risk Management, Pietro Veronesi Mondays IB 312 Tuesdays IB 201 The Wall Street Journal, Financial Times. Email Grading [email protected] Homework and Quizzes (25%) – Five sets of problems and occasional pop quizzes will determine part of your grade. Office Location Midterm (30%) – In-class midterm roughly around the first week of April. IB 305 Final (45%) – In-class final exam per university mandated schedule. Office Hours You need a calculator for general in-class use and exams. You are also expected to be fairly comfortable with Excel for computations. Mondays 10-11am Tuesdays 10-11am or by appointment Teaching Assistant Seda Erdoğan [email protected] Select articles that will be assigned as the semester progresses. Course Contents Below is a tentative outline of the topics that will be covered throughout the semester. Basics of Fixed Income Markets and Securities (2 weeks) An introduction to fixed income markets, discount factors, interest rates, term structure, coupon bonds, floating rate bonds, rate of return, yield to maturity. Interest Rate Risk Management (2 weeks) Duration, convexity, immunization, slope and curvature. Interest Rate Derivatives (3 weeks) Forward rates and contracts, interest rate swaps, futures and options, use of derivatives for hedging and trading. Term Structure Models and More on Derivatives (4 weeks) Risk neutral probabilities, no arbitrage pricing, interest rate models, binomial trees, American options, callable bonds, caps, floors, swaps and swaptions, Monte Carlo simulation. Credit Risk and Credit Derivatives (1 week) Time permitting, we will introduce the concept of credit risk and widely used credit risk derivatives such as Credit Default Swaps (CDS).