UNIVERSITY OF ALBERTA School of Business
Department of Finance & Management Science FINANCE 418 – FIXED INCOME
Barbara Jamieson Fall 2005
Office: BUS 3-40C Telephone: 492-5721 e-mail: [email protected]
Office hours: Mondays and Wednesdays 12 noon – 1:30 p.m.
Class section: A1
Class times: TR 9:30 a.m. – 10:50 a.m.
Class room: BUS B 5
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- 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, 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, fifth edition, 2004 (ISBN: 0-13-049782-7)
A copy of the textbook has been placed on Reserve at Rutherford North Library. The call number is HG 4651 F28 2004.
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 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 date 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 September 28
Homework 2 October 19
Homework 3 November 30
Case Study: A copy of the case that will be used in the class will be made available by the instructor on a cost-recovery basis for $5.00. This amount covers copyright fees, photocopying charges, and GST.
Work on the case 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 A1 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: December 5
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 homework assignments.
2. The midterm exam will be on chapters 1 – 9 and 18 topics.
3. The final exam will focus on chapters 10 – 12, 16, 21, 23 – 26 topics.
4. The final exam is scheduled for 9 a.m. – 11 a.m. on Thursday, December 15.
5. More information about the exams will be posted to the class web site closer to the exam dates.
6. 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.
7. You may use a calculator, but use of the text storage feature or any programming feature will not be allowed.
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, ask for a Statutory Declaration. You can get a sworn Declaration from 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 textbook are indicated below.
Dates Topics Readings and Events
September 8 Introduction Chapter 1
September 13 Pricing of bonds Chapter 2
September 15 Measuring yield Chapter 3
September 20, 22 Bond price volatility Chapter 4 September 27, 29 Term structure of interest
rates
Chapter 5
October 4 Treasury market Chapter 6
October 6 Corporate, municipal, and international bond markets
Chapters 7, 8, 9
October 11 Convertible bonds Chapter 18
October 13 Bonds with embedded
options
Chapter 16 October 18, 20 Liability management Chapter 21
October 27 Midterm Exam
October 25, November 1, 3 Interest-rate futures Chapter 23 November 8, 15 Interest-rate options Chapter 24 November 17, 22 Interest-rate swaps Chapter 25
November 24 Credit derivatives Chapter 26
November 29 Residential mortgage loans Chapter 10 November 29 Mortgage pass-through
securities
Chapter 11 December 1 Collateralized mortgage
obligations
Chapter 12 December 6 Stripped mortgage-backed
securities
Chapter 12