UNIVERSITY OF ALBERTA School of Business
Department of Finance & Management Science FINANCE 418 – FIXED INCOME
Dr. Barbara Jamieson Winter 2007
Office: BUS 3-40C Telephone: 492-5721 e-mail: [email protected]
Office hours: Tuesdays 1:30 p.m. – 3:00 p.m., Wednesdays 10:00 a.m. – 11:30 a.m.
Class section: B1
Class times: TR 9:30 a.m. – 10:50 a.m.
Class room: BUS 2-05
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 important 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, Pearson Prentice Hall, sixth edition, 2006 (ISBN: 0-13-198643-0)
A copy of the textbook has been placed on Reserve at Rutherford North Library. The call number is HG 4651 F122 2007.
Course package: A package consisting of two cases can be purchased at the University of Alberta Bookstore.
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, 2005 Call number: HG4650 C45 2005
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, South- Western, 2002 Call number: HG4650 S86 2002
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 Librairies
Search the Library Catalogue Subject: fixed income
Search
This search yielded 42 titles in May 2006.
Or you can do an online search as follows way:
www.ualberta.ca Librairies Databases Business Finance
ABI Inform Global
Basic search: fixed income Search
This search yielded 7,819 documents (including journal articles) in May 2006. You can search under headings other than "fixed income" as well.
Grading: The marking scheme for the course is as follows:
Homework Assignments 15%
Case Study 15%
Midterm Exam 30%
Final Exam 40%
TOTAL 100%
Homework Assignments: Three homework assignments will be given. The due dates are listed below. Assignments must be submitted to the FIN 418 B1 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.
Due Dates for Homework Assignments:
Homework 1 January 24
Homework 2 February 14
Homework 3 April 4
Case Study: This requires answering some questions and submitting a brief report. This work 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 submission. The instructor will assign the same mark to both members of a pair for the work that is done.
Case reports must be submitted to the FIN 418 B1 assignment slot by 3:00 p.m.
on the due date. Case reports handed in after 3:00 p.m. on the due date will not be accepted.
Due Date for Case Report: March 28
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(2) of the University Calendar)
Examinations:
1. The exams will be on:
• The material discussed in class.
• The material in the class notes.
• The material covered in the homework assignments.
2. The midterm exam will be on chapters 1 – 9 and 19 topics.
3. The final exam will focus on chapters 10 – 12, 17, 24, 26 – 29 topics.
4. The final exam is scheduled for 9 a.m. – 11 a.m. on Tuesday, April 24.
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.
Rereading a homework assignment or exam: If you have a question about marking, speak to the instructor about this within one week of the date that the homework assignment or exam is returned to the class.
Missed Term Work:
1. Any student who misses a homework assignment for a valid reason (medical or other) will be permitted to transfer the weight of that assignment onto the other homework 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 6th edition of the Fabozzi textbook are indicated below. A chapter that is enclosed in brackets is the corresponding chapter from the 5th edition of the textbook. Where there is no chapter enclosed in brackets, the chapter numbering scheme is the same in the 5th and 6th editions.
Read chapters 6 – 9 for some background information and interest only. This course will focus on the details of Canadian bond markets, rather than U.S. bond markets. But there are some details that are common to both markets.
Dates Topics Readings and Events
January 9 Introduction Chapter 1
January 11 Pricing of bonds Chapter 2
January 16 Measuring yield Chapter 3
January 18, 23 Bond price volatility Chapter 4 January 25, 30 Term structure of interest
rates
Chapter 5
February 1 Convertible bonds Chapter 19 (Chapter 18)
February 6 Treasury market Chapter 6
February 8 Corporate, municipal, and international bond markets
Chapters 7, 8, 9 February 13 Bonds with embedded
options
Chapter 17 (Chapter 16) February 15 Residential mortgage loans Chapter 10
February 15 Mortgage pass-through securities
Chapter 11 February 19 - 23 Reading Week
February 27 Collateralized mortgage obligations
Chapter 12
March 1 Midterm Exam Chapter 12
March 6 Stripped mortgage-backed
securities
March 8, 13 Interest-rate futures Chapter 26 (Chapter 23) March 15 Interest-rate options Chapter 27 (Chapter 24) March 20, 22 Interest-rate hedging
March 27, 29 Interest-rate swaps Chapter 28 (Chapter 25) April 3, 5 Credit derivatives Chapter 29 (Chapter 26) April 10,12 Liability management Chapter 24 (Chapter 21)
