UNIVERSITY OF ALBERTA School of Business
Department of Finance & Management Science FINANCE 418 – FIXED INCOME
Dr. Barbara Jamieson Fall 2009
Office: BUS 3-40C Telephone: 780-492-5721 e-mail: [email protected]
Office hours: Mondays, Wednesdays 12 noon – 1:30 p.m.
Class section: A1
Class times: TR 9:30 a.m. – 10:50 a.m.
Class room: BUS 4-09
Prerequisites: FIN 301, FIN 412
Course Description and Objectives: This course provides an overview of fixed income securities that are available in today’s financial markets. Emphasis is placed on
analytical techniques for valuing interest-rate-based financial products and quantifying their risks and on portfolio strategies for achieving specific objectives. The institutional features of North American fixed-income markets are also discussed.
The course has as its objective to convey an understanding of the following subjects:
1. The properties of fixed-income securities such as fixed-rate and floating-rate bonds, callable and putable bonds, convertible bonds, interest-rate futures, interest-rate options, interest-rate swaps, credit derivatives, and mortgage-backed securities.
2. The pricing of standard bonds, bonds with embedded options, interest-rate derivatives, credit derivatives, and mortgage-backed securities.
3. Interest-rate risk management using methods such as duration-based hedging, convexity-based hedging, one-factor models of the term structure, and multi- factors models of the term structure.
Text: The textbook for the course is:
Fabozzi, Frank J., Bond Markets, Analysis and Strategies, Prentice Hall, seventh edition, 2010 (ISBN-10: 0-13-607897-4)
I have requested that a copy of the textbook be placed on Reserve at Rutherford North Library.
Note that it is acceptable to use, instead, the sixth edition:
Fabozzi, Frank J., Bond Markets, Analysis and Strategies, Pearson Prentice Hall, sixth edition, 2007 (ISBN: 0-13-198643-0)
A copy of the sixth edition has been placed on Reserve at Rutherford North Library. The call number is HG 4651 F122 2007.
References: The following books are available at Rutherford North library. Use of these materials is strictly optional. The call numbers are given below.
Moorad Choudhry, Fixed income markets: instruments, applications, mathematics, John Wiley & Son, 2004 Call number: HG4650 C49 2004
Moorad Choudhry, Fixed income securities and derivatives handbook: analysis and valuation, Bloomberg Press, 2004 Call number: HG4650 C45 2004
Lionel Martellini, Philippe Priaulet, Stephane Priaulet, Fixed-income securities:
valuation, risk management and portfolio strategies, Wiley Finance, 2003 Call number: HG4650 M367 2003
Suresh Sundaresan, Fixed income markets and their derivatives, second edition, Academic Press, 2009 Call number: HG4650 S86 2009
You can find other books by searching the shelves around the above-mentioned books.
Also, you can do an online search by going to the library web site:
www.ualberta.ca Libraries
Under “Find Items”, type “fixed income”. Select “in subject”.
Click on “Catalogue Search”.
This search yielded 52 titles in July 2009.
Or you can do an online search as follows:
www.ualberta.ca Libraries
Databases Business Finance
ABI Inform Global
Basic search: fixed income Search
This search yielded 12,814 documents (including journal articles) in July 2009. You can search under headings other than "fixed income" as well.
Grading: The marking scheme for the course is as follows:
Assignments 15%
Case Study 15%
Midterm Exam 30%
Final Exam 40%
TOTAL 100%
Assignments: Three assignments will be given. The due dates are listed below.
Assignments must be submitted to the FIN 418 A1 assignment slot outside the general office located on the third floor of the School of Business building. The cutoff time for dropping off assignments on the due dates is 3:00 p.m. Assignments handed in after 3:00 p.m. on the stated due dates will not be accepted.
Academic Integrity: “One way to work appropriately with your colleagues is to discuss concepts, research and ideas together and then go your separate ways to write your individual assignments … When two or more students submit identical work claiming it is their own, it is a clear sign of inappropriate collaboration. … Having someone write, rewrite, extensively edit or correct your work for you is Cheating”. (University of Alberta, Truth in Education)
Due Dates for Assignments:
Assignment 1 Wednesday, September 23 Assignment 2 Wednesday, October 7 Assignment 3 Wednesday, November 25
Case Work: Two cases will be used in the class, one for the case study and one for class discussion. A copy of the cases will be made available by the instructor on a cost-
recovery basis for $10.00 ($5.00 each). This amount covers copyright fees, photocopying charges, and GST.
Case Study: Work on the case study may be done individually or in pairs. Students may choose the person with whom they will work, if they decide to work in pairs. Both names should appear on the final report. The instructor will assign the same mark to both members of a pair for the work that is done.
Due Date for Report on Case Study: Wednesday, November 18 at 3:00 p.m. Late submissions will not be accepted.
Academic Integrity: "The University of Alberta is committed to the highest standards of academic integrity and honesty. Students are expected to be familiar with these standards regarding academic honesty and to uphold the policies of the University in this respect.
Students are particularly urged to familiarize themselves with the provisions of the Code of Student Behaviour (online at www.ualberta.ca/secretariat/appeals.htm) and avoid any behaviour which could potentially result in suspicions of cheating, plagiarism,
misrepresentation of facts and/or participation in an offence. Academic dishonesty is a
serious offence and can result in suspension or expulsion from the University." (Section 23.4 of the University Calendar)
Examinations:
1. The exams will be on:
The material discussed in class.
The material in the class notes, including suggested questions from the textbook listed at the beginning of each note.
The material covered in the assignments.
2. The midterm exam will be on Fabozzi, 7th edition, chapters 1 – 9 and 20 topics (Fabozzi, 6th edition, chapters 1 – 9 and 20 topics).
3. The final exam will focus on Fabozzi, 7th edition, chapters 10 – 12, 18, 25, 27 – 30 topics (Fabozzi, 6th edition, chapters 10 – 12, 17, 24, 26 – 29 topics).
4. The tentative date for the final exam (subject to confirmation by the University) is 9 a.m. – 11 a.m. on Tuesday, December 8.
5. You may bring a “formula” sheet to each exam. One standard-sized sheet (or two pages) will be allowed. The only restriction with respect to form and content (other than size) is that the “formula” sheet must be in your own handwriting.
6. You may use a calculator, but use of the text storage feature or any programming feature will not be allowed.
7. More information about the exams will be posted to the class web site closer to the exam dates.
Questions about Marking: If you have a question about marking, speak to the instructor within one week of the date that the assignment, case report, or exam is returned to the class.
Missed Term Work:
1. Any student who misses an assignment for a valid reason (medical or other) will be permitted to transfer the weight of that assignment onto the other assignments.
A student who misses any other term work for a valid reason will be permitted to transfer the weight of that term work onto the final exam. A medical note or other documentation (such as a Statutory Declaration) will be required to prove valid cause. The documentation must be given to the instructor within one week following the missed term work. In the case of absence from the final exam, the student must apply through the Undergraduate Office to write a deferred exam.
2. In the event of illness, if you visit the University Health Centre or your family doctor for medical treatment, they will provide a medical note. But be aware that the University Health Centre will no longer provide a medical note in the
following circumstances:
Where the missed term work or exam is worth less than 20% of the final course mark.
Where the student requests a note “after the fact”, that is, after s/he is no longer ill.
3. In the event that you miss term work for a valid reason and do not have a medical note (perhaps you did not go to your family doctor or to the University Health
Centre or perhaps your reason for missing the work was not due to illness), you might, in that circumstance, make a Statutory Declaration. You can make a sworn Declaration at the Office of the Registrar, Examinations/Timetabling, room 120, Administration Building.
Final Grade: Your final grade for the course will be based on the marks you accumulate during the term and will depend on both your absolute and relative standings. Once all the course marks are compiled, students will be ranked and grades will be assigned. If you achieve a course mark of at least 50%, you will receive a passing grade (that is, a grade of at least D).
Tentative Class Schedule: Recommended readings from the 7th edition of the Fabozzi textbook are indicated below.
Read chapters 6 – 9 for some background information and interest only. This course will focus on the details of Canadian bond market, rather than U.S. bond market. But there are some details that are common to both markets.
Dates Topics Readings and Events
September 3 Introduction Chapter 1
September 8 Pricing of bonds Chapter 2
September 10 Measuring yield Chapter 3
September 15, 17 Bond price volatility Chapter 4 September 22, 24 Term structure of interest
rates
Chapter 5
September 29 Convertible bonds Chapter 20
October 1 Treasury, corporate,
municipal, and international bond markets
Chapters 6, 7, 8, 9
October 6 Bonds with embedded
options
Chapter 18 October 8 Residential mortgage loans Chapter 10
October 13 Mortgage pass-through
securities
Chapter 11 October 15 Collateralized mortgage
obligations
Chapter 12
October 15 Stripped mortgage-backed
securities
Chapter 12
October 20 Midterm Exam
October 22, 27 Interest-rate futures Chapter 27 October 29, November 3 Interest-rate options Chapter 28 November 5, 12 Interest-rate hedging
November 17, 19 Interest-rate swaps Chapter 29 November 24, 26 Credit derivatives Chapter 30 December 1, 3 Liability management Chapter 25
Tentative Class Schedule: Recommended readings from the 6th edition of the Fabozzi textbook are indicated below.
Read chapters 6 – 9 for some background information and interest only. This course will focus on the details of Canadian bond market, rather than U.S. bond market. But there are some details that are common to both markets.
Dates Topics Readings and Events
September 3 Introduction Chapter 1
September 8 Pricing of bonds Chapter 2
September 10 Measuring yield Chapter 3
September 15, 17 Bond price volatility Chapter 4 September 22, 24 Term structure of interest
rates
Chapter 5
September 29 Convertible bonds Chapter 19
October 1 Treasury, corporate,
municipal, and international bond markets
Chapters 6, 7, 8, 9
October 6 Bonds with embedded
options
Chapter 17 October 8 Residential mortgage loans Chapter 10
October 13 Mortgage pass-through
securities
Chapter 11 October 15 Collateralized mortgage
obligations
Chapter 12
October 15 Stripped mortgage-backed
securities
Chapter 12
October 20 Midterm Exam
October 22, 27 Interest-rate futures Chapter 26 October 29, November 3 Interest-rate options Chapter 27 November 5, 12 Interest-rate hedging
November 17, 19 Interest-rate swaps Chapter 28 November 24, 26 Credit derivatives Chapter 29 December 1, 3 Liability management Chapter 24
