National Economics University
Fall 2011 (August 29th to September 16th, 2011)
FIN485 Fixed Income Analysis
Professor Yea-Mow Chen
Office hours: by appointment
Email: ymchen@sfsu.edu or yeamowchen@gmail.com
Phone: 012-8535-9468 (in Vietnam)
Required Textbook:
Fabozzi, Frank J., Fixed Income Analysis (CFA Institute Investment Series), 2nd edition,
John Wiley & Sons, 2007
Fixed Income Analysis Workbook, 2nd edition, Wiley & Sons, 2007.
Supplementary Textbooks:
Anson, Mark J., Frank J. Fabozzi, and Frank J. Jones, The Handbook of Traditional and
Alternative investment Vehicles, John Wiley & Sons, 2011.
Ho, Thomas S.Y., and Sang Bin Lee, Securities Valuation, Oxford University Press,
2005.
Course Objectives:
This course provides an in-depth understanding of the key features of fixed-income
securities that are commonly issued and traded in the global financial markets, including
their structure, risk and returns, and risk management applications. The goals of the
course are:
(1) To be exposed to the key features of both traditional and newly innovated fixed
income instruments in a global context, including those that are called structured
financial products that were at the center of the most recent global financial crisis.
Interest rate derivative securities and their hedging applications are also covered;
(2) To provide analytical techniques for analyzing the price relationship with yields
(interest rates);
(3) To illustrate how to value some of the fixed income securities;
(4) To introduce the process of financial innovations applied to fixed income securities,
in particular, the securitization process;
(5) To illustrate the mechanics and intuition of financial risk management (hedging) with
fixed income securities.
Pre-requisites:
This class assumes thorough knowledge of Introductory Corporate Finance.
Course Materials:
(1) Lecture slides will be made available prior to each of the classes.
(2) Review financial websites, such as bloomburg.com, finance.yahoo.com,
marketwatch.com, cnbc.com, and financialtime.com for the daily developments in the
global credit market.
(3) A financial calculator with built-in functions for bond price calculations.
.
Grading:
Grades will be determined based on the weighted average of the following items: two
exams - one midterm (35%), a final (35%), and in-class quizzes (30%) for a total of
100%. Exams are open-book, but should be taken individually. In-class quizzes are to
be offered randomly on certain meetings only, not on all.
Calculator:
To help speeding up your computation, you might need a financial calculator that is
equipped with modules for present value and future value calculations.
Exams:
1. The midterm and final exams will be open book and notes.
2. The use of a financial calculator will be permitted.
3. Exams will be individual effort. No discussions and passing of exam and study
materials during the exam will be allowed.
4. Because of the short length of the session, there will be no make-up for any of the
examinations.
5. If you miss any one of them for legitimate reasons, specifically medical, consult with me
immediately.
Homework Assignments:
Numerical problems from the Workbook are assigned as homework problems. You are not
required to turn them in, because solutions have been provided in the Workbook. You are,
however, required to go over them after each chapter. We will review and/or answer some
of the problems assigned.
Class Attendance: This is an intensive three-week class and there is no time to make up any
missing classes. If you miss any one of them, you are required to pick up all the readings
and study by yourself. I can explain a few concepts with you, but I cannot repeat what I
have gone over in the class. Warning: Not attending the class can result into lower
course grade as you could miss the quits to be administered which accounts for 30% of
the course grade.
Useful Web Sites
• Securities Industry and Financial Markets Association (SIFMA):
http://www.bondmarkets.com
• Securitization News: http://www.securitization.net
• US Department of Treasury: http:/www.ustreas.gov
• Federal Reserve Bank, information about spreads in fixed-income markets:
http://www.federalreserve.gov/releases/H15/data.htm
• Emerging market debt: http://www.bradynet.com
• US municipal bond market: http://www.msrb.org
• Credit ratings:
– Moody’s: http://www.moodys.com
– Standard & Poor’s (CBRS): http://www2.standardandpoors.com
– DBRS: http://q9.dbrs.com/intnlweb/jsp/content/home.faces
– Fitch: http://www.fitchratings.com
FIN 485 Fixed Income Analysis Course Schedule (Notice that this schedule is subject
to revision upon knowing the background of the class)
Date (Week 1)
Topic
Readings
Workbook
Assignments
8/29/2011 (Monday)
Introduction to Bond Valuation
Global Bond Market Development
1 FEATURES OF DEBT SECURITIES
Ch 1
Problem 3, 4,
5, 6
8/30/2011 (Tuesday)
2. RISKS ASSOCIATED WITH INVESTING IN
Ch. 2
BONDS
3 OVERVIEW OF BOND SECTORS AND
12, 13, 15, 18
Ch.3
INSTRUMENTS
8/31/2011
4. UNDERSTANDING YIELD SPREADS
(Wednesday)
4.1 Interest Rate Determination
Problem 5,
Problem 7,
18,
Ch 4
Problem 5, 8,
12, 16, 17
4.2 U.S. Treasury Rates
4.3 Swap Spreads
5. VALUATION OD DEBT SECURITIES
Ch 5
5.1 Traditional Approach to Valuation
Problems 3, 5,
7, 9, 10
5.2 The Arbitrage-Free Valuation Approach
5.3 Valuation Models
9/1/2011 (Thursday
5. VALUATION OD DEBT SECURITIES
Morning)
5.1 Traditional Approach to Valuation
Ch 5
Problems 3, 5,
7, 9, 10
5.2 The Arbitrage-Free Valuation Approach
5.3 Valuation Models
6. YIELD MEASURES, SPOT RATES AND
Problems 9,
FORWARD RATES
10, 11, 14, 16,
6.1 Traditional Yield Measures
18, 19, 21, 25,
6.2 Theoretical Spot Rates
26, 28
6.3 Forward Rates
9/2/2011 (Friday)
Ch. 6
National Holiday – No Class
Review – to be made up on a later date
Date (Week 2)
Topic
Readings
Workbook
Assignment
9/5/2011 (Monday)
6. YIELD MEASURES, SPOT RATES AND
Ch 6
Problems 9,
FORWARD RATES
10, 11, 14, 16,
6.1 Traditional Yield Measures
18, 19, 21, 25,
6.2 Theoretical Spot Rates
26, 28
6.3 Forward Rates
7. MEASURING INTEREST RATE RISK
Ch. 7
7.1 Price Volatility Characteristics of Bonds
Problems 11,
12, 13, 15, 16
7.2 Duration and Convexity
7.3 Price Value of a Basis Point
9/6/2011 (Tuesday)
7. MEASURING INTEREST RATE RISK
Ch 7
7.1 Price Volatility Characteristics of Bonds
Problems 11,
12, 13, 15, 16
7.2 Duration and Convexity
7.3 Price Value of a Basis Point
8 TERM STRUCTURE AND VOLATILITY OF
Ch. 8
INTEREST RATES
9/7/2011
Midterm I
(Wednesday)
8 TERM STRUCTURE AND VOLATILITY OF
Ch 8
INTEREST RATES
Problems 14,
17, 18, 19, 21
8.1 Construct a Spot Rate Curve
8.2 The Swap Curve
8.3 Theories on the Terms Structure
8.4 Measuring Yield Curve Risk
9/8/2011 (Thursday
9. VALUING BONDS WITH EMBEDDED OPTIONS
Morning)
9.1 Valuing an Option-Free Bond
9.2 Using the Binomial Model
9.3 Valuing Callable and Putable Bonds
9.4 Analysis of Convertible Bonds
9/9/2011 (Friday)
Review
Ch 9
Problems 5, 7,
12, 21, 22, 23
Date (Week 3)
Topic
Readings
Workbook
Assignment
9/12/2011 (Monday)
9. VALUING BONDS WITH EMBEDDED
Ch 9
OPTIONS (Continued)
Problems 5, 7,
12, 21, 22, 23
9.1 Valuing an Option-Free Bond
9.2 Using the Binomial Model
9.3 Valuing Callable and Putable Bonds
9.4 Analysis of Convertible Bonds
9/13/2011 (Tuesday)
10 MORTGAGE-BACKED SECTOR
Ch 10
Problems 1, 2,
10.1 Residential Mortgage Loans
4, 5, 6, 7, 8,
10.2 Mortgage Passthrough Securities
10, 13, 14, 28,
10.3 Collateralized Mortgage Obligations
29, 31
10.4 Stripped Mortgage-Backed Securities
9/14/2011
10 MORTGAGE-BACKED SECTOR
(Wednesday)
10.1 Residential Mortgage Loans
4, 5, 6, 7, 8,
10.2 Mortgage Passthrough Securities
10, 13, 14, 28,
10.3 Collateralized Mortgage Obligations
29, 31
Ch. 10
Problems 1, 2,
10.4 Stripped Mortgage-Backed Securities
11. Asset-Backed Securities
Ch. 11
11.1 The Securitization Process and Features of ABS
Problems 4, 5,
15, 25, 36
11.2 Residential ABS
11.3 Other Asset ABS
11.3 Collateralized Debt Obligations (CDOs)
9/15/2011 (Thursday
22 CONTROLLING INTEREST RATE RISK WITH
Ch. 22
Problems 3,
Morning)
DERIVATIVES
12, 16, 17, 21,
22.1 Controlling Interest Rate Risk with Futures
22
22.2 Controlling Interest Rate Risk with Swaps
22.3 Hedging with Options
22.4 Using Caps and Floors
9/16/2011 (Friday)
Review
Note: * Depending on the pace of the class, we may cover only a portion of the chapter or skip the chapter.
Final Exam will be scheduled by the Department.