National Economics University
Summer 2014 (July 21st to August 8th, 2014)
FIN485 Section 1: Fixed Income Analysis
Professor Yea-Mow Chen
Office hours: by appointment
Email: ymchen@sfsu.edu or yeamowchen@gmail.com
Phone: (cell phone no. in Vietnam: to be provided)
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.
Fabozzi, Frank J., Bond Markets, Analysis and Strategies, 8th edition, Pearson, 2013.
Supplementary Textbooks:
Johnson, R. Strafford, Bond Evaluation, Selection, and Management, Blackwell
Publishing 2004. (A textbook has a step-by-step presentation on some topics.)
Ho, Thomas S.Y., and Sang Bin Lee, Securities Valuation, Oxford University Press, 2005.
(Good for pricing modeling of fixed income securities.)
Fabozzi, Davis, and Choudhury, Introduction to Structured Finance, Wiley Finance, 2006.
(A book describing structured finance in more details.)
Course Objectives:
This course introduces the key features of fixed-income securities that are commonly
issued and traded in the global financial markets and the valuation of these securities.
More advanced topics, such as bond pricing with embedded options, securitized
derivatives, and risk hedging with derivatives, are also covered.
The goals of the course are:
(1) To introduce both the traditional and innovative fixed income securities;
(2) To provide analytical techniques for pricing of fixed income securities and analyze
the price relationship with yields (interest rates);
(3) To introduce the process of financial innovations for the creation of structured
financial products;
(4) To analyze the various risks associated with fixed income securities and risk
measurement models;
(5) To illustrate the mechanics and intuition of financial risk management (hedging) with
fixed income securities.
Pre-requisites:
This class assumes a thorough knowledge of Corporate Finance and some basic
understanding about pricing of financial products, in particular pricing of bonds.
Course Materials:
1. Lecture note slides will be made available prior to each of the classes;
2. Outside readings related to the current developments of the global bond markets will
be brought to the attention of the class;
3. It is advised that you review related financial websites on a regular basis for the most
current issues and developments in the global bond market. The website by SIFMA
(the securities dealers association) offer the most updated market statistics on
difference types of fixed income securities.
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. A computer for
spreadsheet calculations and programming will be highly recommended if you can use it to
do programming for pricing or for strategic applications.
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 around of exams and
study materials during the exam will be allowed.
4. Because of the intensive nature of the course, we don’t have time for no making-up
of the examination(s) you have missed. If you miss any one of them for legitimate
reasons, specifically medical, consult with me immediately.
Homework Assignments:
Numerical problems from the chapters are to be assigned as homework problems. You are
not required to turn them in. 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 in lower course grade as you could miss the
quizzes to be offered randomly in some of the class meetings. Quizzes account for
30% of the course grade.
Course Grade
Your course grade will be determined by: (1) two exams, each one counts for 35%;
and (2) several in-class quizzes for a total of 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
• Asian Development Bank: http://www.adb.org
Bank for International Settlements: http://www.bis.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
Date (Week 1)
Topic
Readings
from
2nd Edition
7/21/2014
Global Bond Market Developments in 2013
Readings from
Workbook (2nd
8th Edition
Ed.) Assignments
Articles cited
(Monday)
1. REVIEW OF BOND SECURITIES AND
MARKETS
Feature of Debt Securities
Ch 1
Ch. 1
Problems 3, 4, 5, 6
Risks Associated with Investing in Bonds
Ch. 2
Ch. 1
Problems 5, 12, 13,
15, 18
7/22/2014
Overview of Bond Sectors and Instruments
Ch. 3
Ch. 1
Problems 7, 18
2. UNDERSTANDING YIELD SPREADS
Ch. 4
Ch. 2-3
Problems 5, 8, 12,
(Tuesday)
16, 17
3. VALUATION ON DEBT SECURITIES
Ch. 5
Ch. 2-3
3.1 Traditional Approach to Valuation
Problems 3, 5, 7, 9,
10
3.2 The Arbitrage-Free Valuation Approach
3.3 Valuation Models
7/23/2014
3. VALUATION OD DEBT SECURITIES
(Wednesday)
(CONTINUES)
4. YIELD MEASURES, SPOT RATES AND
Ch. 5
Ch. 2-3
Problems 3, 5, 7, 9,
10
Ch. 6
Problems 9, 10, 11,
FORWARD RATES
14, 16,18, 19, 21,
4.1 Traditional Yield Measures
25,26, 28
4.2 Theoretical Spot Rates
4.3 Forward Rates
7/24/2014
4. YIELD MEASURES, SPOT RATES AND
(Thursday
FORWARD RATES (Continued)
Ch. 6
Problems 9, 10, 11,
14, 16, 18, 19, 21,
Morning)
25, 26, 28
5. MEASURING INTEREST RATE RISK
5.1 Price Volatility Characteristics of Bonds
5.2 Duration and Convexity
5.3 Price Value of a Basis Point
7/25/2014
(Friday)
Review
Ch. 7
Ch. 4
Problems 11, 12,
13, 15, 16
Date (Week 2)
Topic
7/28/2014
5. MEASURING INTEREST RATE RISK
(Monday)
(Continued)
6. TERM STRUCTURE AND
Readings from
Readings from 8th
Workbook
2nd Edition
Edition
Assignment
Ch. 7
Problems 11, 12, 13,
15, 16
Ch. 8
Ch. 5
VOLATILITY OF INTEREST RATES
Problems14, 17, 18, 19,
21
6.1 Construct a Spot Rate Curve
6.2 The Swap Curve
6.3 Theories on the Terms Structure
6.4 Measuring Yield Curve Risk
7/29/2014
Midterm I
(Tuesday)
7. VALUING BONDS WITH EMBEDDED
Ch. 9
Ch. 17 & 19
OPTIONS
Problems 5, 7, 12, 21,
22, 23
7.1 Valuing an Option-Free Bond
7.2 Using the Binomial Model
7.3 Valuing Callable and Putable Bonds
7.4 Analysis of Convertible Bonds
7/30/2014
7. VALUING BONDS WITH EMBEDDED
(Wednesday)
OPTIONS (Continued)
7/31/2014
8. MORTGAGE-BACKED SECTOR
(Thursday)
8.1 Residential Mortgage Loans
7, 8, 10, 13, 14, 28, 29,
8.2 Mortgage Passthrough Securities
31
8.3 Collateralized Mortgage Obligations
8.4 Stripped Mortgage-Backed Securities
8/1/2014
(Friday)
Review
Ch 9
Ch. 17 & 19
Problems 5, 7, 12, 21,
22, 23
Ch. 10
Ch. 10, 11, 12
Problems 1, 2, 4, 5, 6,
Date (Week 3)
Topic
8/4/2014
8. MORTGAGE-BACKED SECTOR
(Monday)
(Continued)
Readings from
Readings from 8th
Workbook
2nd
Edition
Assignment
Ch. 10, 11, & 12
Problems 1, 2, 4, 5, 6,
Edition
Ch. 10
7, 8, 10, 13, 14, 28, 29,
31
9. ASSET-BACKED SECURITIES
Ch. 11
Ch. 15
9.1 The Securitization Process and Features
Problems 4, 5, 15, 25,
36
of ABS
9.2 Residential ABS
9.3 Other Asset ABS
9.4 Collateralized Debt Obligations (CDOs)
8/5/2014
10. CONTROLLING INTEREST RATE
(Tuesday)
RISK WITH DERIVATIVES
Ch. 22
Ch. 26, 27, & 28
Problems 3, 12, 16, 17,
21, 22
10.1 Controlling Interest Rate Risk with
Futures
10.2 Controlling Interest Rate Risk with Swaps
10.3 Hedging with Options
10.4 Using Caps and Floors
8/6/2014
10. CONTROLLING INTEREST RATE
(Wednesday)
Ch. 22
Ch. 26, 27, & 28
RISK WITH DERIVATIVES (Continued)
8/7/2014
11. Credit Analysis and Credit Derivatives
Problems 3, 12, 16, 17,
21, 22
Ch. 24
Ch. 29
To be assigned
(Thursday)
8/8/2014 (Friday)
Review
Notes:
1.
Please read the first three chapters to refresh your minds about the features of bond securities.
2.
Depending on the pace of the class, we may spend more time on some of the topics and less on others to
allow for a better understanding of the materials.
3.
Final Exam will be scheduled by the Program.