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Fixed Income Securities Essay

Objectives: This course is intended to analyze the fixed income securities markets and its implications for investments. It will analyze the market characteristics, instruments, selling techniques, pricing and valuation issues, floating rate instruments, risk and return of fixed income securities, portfolio management techniques, term structure modeling, corporate debt and convertibles, bonds with embedded options, sub-national debt analysis, credit risk analysis, and interest rate risk management with swaps, options and futures. The course intends to cover the specific features of the Indian Fixed Income Securities Markets. The course will construct several Excel based techniques to analyze bond cashflows analytics.

Course Structure: The course will include lectures, bond cash flows analysis, term paper assignments and class exercises.

Contents: Lecture 1: Indian Fixed Income Markets, Institutional Arrangements, Market Participants and Instruments, Investors Perspectives, Market Conventions, Debt Management & Monetary policies

Lecture 2: Bond Valuation, Time Value of Money, Price and Yield Conventions, Bond Valuation using Yield Curve, Yield & return, horizon return; Valuation of Repo & Reverse Repo

Lecture 3: Valuation of other Bonds: Floating Rate securities, Inflation index bonds, bonds with embedded options

Lecture 4: Introduction to Bloomberg, Interpretations of Fixed Income Instruments using Bloomberg Templates, Understanding Market Quotes and Conventions

Lecture 5: Corporate Bonds, Valuation, Implications for Rating & Migration, Investment Grade and Low Rated Bonds, Valuation of Convertibles

Lecture 6 & 7: Risk Identification in Bonds: Duration, Convexity, and Portfolio Immunization

Lecture 8 : Yield Curve Analysis, Par Bootstrapping, Modeling YC using Nelson-Seigel and Spline Methods, Spot & Forward rates, , Valuation of STRIPS

Lecture 9: Term Structure of Interest Rates theories; Interest Rate Models (Cox-Ingersoll-Ross, Vasicek, HJM Model)

Lecture 10: Government Securities Auction, Market Implications, WI Markets, Auction & Primary Dealers Lecture 11: Auction & Bidding: Game (students play bidding game and trade online in Computer Lab)

Lecture 12: Bond Portfolio Construction & Management; Bullet, Barbell & Ladder Strategies, Construction of Bond Portfolio; Portfolio with Corporate Bonds

Lecture 13, 14 & 15: Interest Rate Derivatives: FRAs, Swaps, Futures, Options, Eurodollar Futures, OIS(Overnight Index Swaps), OIS Trading & Arbitrage

Lecture 16: Bonds with embedded options, BDT Model(Modeling Interest Rate Tree)

Lecture 17: Mortgage-Backed Securities, Prepayments, Option Adjusted Spreads(OAS)

Lecture 18: Credit Derivatives, Valuation of Credit Default Swaps, Indian CDS

Lecture 19 & 20: Assignment Discussions & Presentations

Other handouts:

The course will provide several articles in debt and fixed income securities, circulars of RBI and FIMMDA, empirical techniques dealing with bond management, as well as my presentations, excel spreadsheet calculations, valuation templates from Bloomberg as well as web resources.

Expectations: My expectation is that students work hard during the course, understand bond mathematics, how Indian bond market works and its implications on fixed income investing as an asset class, and portfolio implications for banks and financial institutions.


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