Fixed Income Markets Course

Professor Philippe Jorion

PAUL MERAGE SCHOOL OF BUSINESS
UNIVERSITY OF CALIFORNIA
IRVINE, CALIFORNIA 92697-3125


Course Description:

The purpose of this course is to provide participants with a working knowledge of the fixed-income markets. Originally, fixed-income instruments simply consisted of bonds, which are tradable securities that promise to make a pre-specified series of payments over time. Over time, the market has developed a bewildering array of instruments, including high yield bonds, asset-backed securities, credit derivatives, and so on. By now, fixed income instruments represent the largest global financial markets, even larger than equities.

Asset managers such as PIMCO have enjoyed great success investing in the fixed-income market. At the same time, a good knowledge of fixed income securities is essential for the corporate sector, as companies more than often raise funds in the form of bonds rather than shares. This course is also an excellent preparation for students interested in taking the Chartered Financial Analysts (CFA) examination, which involves many questions on fixed-income markets.

This course will cover the pricing and risk management of fixed-income products, as well as introduction to fixed-income derivatives. It will discuss interest rate management, product fundamentals, and portfolio strategies.

The course involves a mix of lectures and exercises. We will make extensive use of the Bloomberg system, which is the premier analytical system for managing bond portfolios. The workload for this course will be heavy, reflecting the quantitative nature of this market. The primary focus of the course, however, is on practical applications.

Course Materials:

The required text is:

Bond Markets, Analysis and Strategies, by Frank Fabozzi, 2003, FIFTH edition,
Prentice-Hall: Englewood Cliffs, New Jersey,

with in addition Powerpoint notes and other materials.



Fixed-Income Course: Schedule

(Note: This is superseded by the information on the Catalyst system)
    Review: The Bond Markets, Pricing of Bonds, Yields
    Readings: Fabozzi, Ch 1, 2, 3
    Solutions-Chapter2
    Solutions-Chapter3

  1. Session 1
    Interest Rate Management
    Readings: Fabozzi, Ch 4
    Solutions-Chapter4

  2. Session 2
    The Term Structure of Interest Rate
    Readings: Fabozzi, Ch 5
    Solutions-Chapter5

  3. Session 3
    The Term Structure of Interest Rate (continued)
    The Bloomberg System

  4. Session 4
    The Bloomberg System #1
    Assignment due: Bloomberg System #1

  5. Session 5
    Treasuries, Corporates and Non-U.S. Bonds
    Readings: Fabozzi, Ch 6, 7, 9
    Solutions-Chapter6
    Solutions-Chapter7
    Solutions-Chapter9

  6. Session 6
    Derivatives: Forwards, Futures, Swaps, Options
    Readings: Fabozzi, Ch 23, 24, 25 (4th ed: 21, 23, 22)
    Solutions-Chapter23
    Solutions-Chapter24
    Solutions-Chapter25

  7. Session 7
    Derivatives: Credit Derivatives
    The Bloomberg System #2
    Assignment due: Bloomberg System #2

  8. Session 8
    Mortgage-Backed Securities, Collateralized Mortgage Obligations
    Readings: Fabozzi, Ch 10, 11
    Solutions-Chapter10
    Solutions-Chapter11
    Solutions-Chapter12
    Assignment due: CORPORATE BOND STRATEGIES

  9. Session 9
    Portfolio Management Strategies
    The Bloomberg System #3
    Readings: Fabozzi, Ch 19, 20, 21 (4th ed: 17, 18, 20)
    Solutions-Chapter19
    Solutions-Chapter20
    Solutions-Chapter22
    Assignment due: Bloomberg System #3

  10. Session 10
    Analysis of Bonds with Options
    Readings: Fabozzi, Ch 14, 15


Course Organization:

Prerequisites
The prerequisite for this course is the investment class (209B). Elementary concepts such as time value of money, yield, discounting, pricing of bonds are assumed known. It would be preferable to take the derivatives class concurrently, although this is not necessary.

Requirements
The course will involve about 5-7 assignments, which will all be graded. All assignments should be done individually and handed in at the beginning of class. Assignment not turned in on time will result in a grade of zero, unless prior arrangements are made with the instructor. Some of these assignments involve the Bloomberg system, using one of the two terminals in the computer lab. Others will involve spreadsheet-based exercises.

Course Grades
The course grade will be based on assignments and the final, with an equal weight on each category. Active class participation is also important.

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© 2005 - Philippe Jorion.