University of Hong Kong, School of Business
FIXED INCOME SECURITIES AND
INTEREST RATE MODELLING
(MFIN7012)
(Module 4, 2010 - 2011)
I. Basic Information
Instructor:
Email:
Office:
Phone:
Dr Andrew Carverhill
carverhill@business.hku.hk
Room 1108A, K.K.Leung Building
(852) 2857 8358
Tutor:
Email:
Office:
Phone:
Luo Dan
luodan0816@gmail.com
Room 1122, K.K.Leung Building
(852) 6357 8402
Pre-requisite courses: CCPA, Derivatives, Math I and FAVI
Textbook: Fixed Income Securities: Tools for Today’s Markets, by Bruce Tuckman (Wiley,
2nd Edition, 2002).
Supplementary text: Financial Markets and Corporate Strategy, by M. Grinblatt and S.
Titman (McGraw Hill, 2nd Edition)
Other material: I will distribute some readings on recent events in the markets; I will distribute
spreadsheets containing course material
II. Course Description and Objectives
Course overview: “Fixed Income Securities” covers all financial instruments, such as bonds,
loans and mortgages, whose payments are determined by the contract. These securities make up
a very substantial proportion of all investment and financing, both for Governments, Businesses
and individuals. In this course we will learn about the design, functions and modelling of these
securities, and associated derivatives. We will also learn how these many instruments are related
to each other, and how to manage the risk associated with them. Finally, we will discuss current
events and issues relating to fixed income securities.
Course objectives:
1. To appreciate the role of fixed income securities in finance.
2. To understand basic models of the term structure of interest rates and their dynamics.
3. To master techniques for analysing and dealing with risks associated with fixed income
securities and associated derivative securities.
4. To provide an overview of the fixed income markets, including recent developments and
innovations.
III. Intended Learning Outcomes (ILOs)
Upon completion of this course, you are expected to:
ILO1: Know the structure and functions of the fixed income market and the roles of market
participants
ILO2: Know the principles of modelling, valuation and risk management of fixed income
securities and their derivatives.
ILO3: Be able to apply the techniques of valuation and hedging
ILO4: Understand current developments and issues in the global debt market.
ILO5: Be a team player
IV. Alignments of Program and Course ILOs
Program ILOs
1. Acquisition and internalization of knowledge and techniques in
the discipline of modern finance
2. Application and integration of knowledge in the finance
profession
3. Mastering communication skills
4. Inculcating professionalism and leadership
5. Developing a global outlook
Course ILOs
ILO1, ILO2, ILO3
ILO1, ILO2, ILO3
ILO5
ILO4
V. Teaching and Learning Activities
The course will be taught partly as lectures, and partly as spreadsheet exercises to be started in
class and completed as homework. These exercises will form part of the homework assignments,
to be done in groups of up to 5 students. Therefore we will need notebook computers – at least 1
per group – in class. These homework assignments should be submitted to my TA, who will
make comments and allow 2 resubmissions, with strict deadlines, and then give a mark for
the assignment. The most important learning activity in this course is doing the weekly
assignments, and I should emphasize that my classes are essential for being able to do these.
VI. Assessment
The final exam will count 50% towards the assessment, and will be open-book. The weekly
homework assignments will in total count 50%. As mentioned above, the most important
learning activity in this course is doing the weekly assignments. The final exam is mainly
designed to test your appreciation of the assignments, and the midterm exams are intended to
provide timely feedback on your progress, and to show you the format of the final exam.
Final course grading will follow the University Masters Level guidelines: A – Excellent; B –
Good; C – satisfactory; D – Pass.
VII. Course Policies
Attendance Requirement
The school requires that students attend at least 70% of the classes; otherwise, they may be
treated as have failed the whole course. Except for unexpected, unavoidable events, if
students find themselves unable to attend a class, they are asked to inform the teacher
concerned or the MFin Programme Office beforehand in writing. Coming late to class is also
not encouraged. If students are 30 minutes late, they will be regarded as not having attended
the class.
Academic Dishonesty
The University Regulations on academic dishonesty will be strictly enforced! Please check
the University Statement on plagiarism on the web: http://www.hku.hk/plagiarism/
Academic dishonesty is any act that misrepresents a person’s own academic work or that
compromises the academic work of another. It includes (but not limited to) cheating on
assignments or examinations; plagiarizing, i.e., representing someone else’s ideas as if they
are one’s own; sabotaging another’s work.
If you are caught in an act of academic dishonesty or misconduct, you will receive an “F”
grade for the subject. The relevant Board of Examiners may impose other penalty in relation
to the seriousness of the offense.
VIII. Course Schedule
Part 0:
Part 1:
Part 2:
Part 3:
Part 4:
Part 5:
Fixed income securities and markets – basic overview
Bonds and interest rates – basic analysis
Spot rates, forward rates, etc.; the term structure of interest rates
(Tuckman, Ch 1, 2, 3, 4)
Corporate debt financing
Loans, commercial paper, bonds, covenants, convertible bonds, ratings.
(Grinblatt and Titman, Ch 2, 16)
Interest rate risk management
Duration and hedging, interest rate futures.
(Tuckman Ch 5, 6, 17, 18, 20)
Mortgages and securitization; recent issues in debt financing
Mortgages, securitization, CDSs, CDOs, the “subprime crisis”
(Tuckman Ch 21, and separate readings)
Term Structure modelling and its applications
Interest rate expectations, risk premia and convexity.
Modelling the term structure of interest rates.
Application to callable bonds, mortgages, etc.
(Tuckman Ch9, 10, spreadsheets)