Fixed Income


Fixed income securities include bonds that promise a fixed income stream and also other securities with contingent payments whose valuation depends on interest rates. Fixed income is one of the largest financial markets. For example, at the end of 2011 the U.S. government debt stood at 9.9 trillion USD (expected to keep rising); also, the notional value of the interest rate swap market was 402 trillion USD. From the corporate side, effective interest rate risk management is essential. Another example like, more than 90% of the world s largest 500 companies, use fixed income derivatives to manage their interest rate risk exposure.

This course covers the main models and techniques used to analyze fixed income instruments and their derivatives. The course aims to provide students with the concepts and tools that money managers and risk managers use every day to decide on how to allocate investments or to manage the interest rate risk exposure of mutual funds, hedge funds, insurance companies, investment banks, and other large nonfinancial firms.

General characterization





Responsible teacher

João Pedro Pereira


Weekly - Available soon

Total - Available soon

Teaching language





A set of handouts will be distributed in class. They are based on the following books:

1. Veronesi. Fixed income securities: valuation, risk, and risk management. John Wiley & Sons, 2011.

a. has solutions to exercises and other resources.

2. Hull. Options, futures, and other derivatives. Pearson, 8th ed, 2012. (or newer edition)

3. Tuckman and Serrat. Fixed Income Securities. John Wiley and Sons, 2011.

Teaching method

1.    Reviewing the content of the lectures and related bibliography.
2.    Solving homework problems

Evaluation method

Weights: I will compute the following two options and assign you the highest result:

 Final exam:   Option A  50%  -  Option B 70%

Cases and Problem Sets: Option A 30%  -  Option B  30%

Quizzes Option A20%  -  Option B  0%

Class participation counts towards rounding the final grade. Good class participation consists of asking informed questions or making informed comments that improve the overall learning of the class, as well as answering the questions asked in class.

Subject matter

The course has 12 and we will cover the following topics:

 1. Basics of fixed income

a. Markets and securities b. Price quotes c. Discount factors and interest rates d. Fixed-coupon bonds e. Floating-rate bonds 

2. Yield curve fitting a. Bootstrap b. Nelson and Siegel model c. Svensson model

3. Bond portfolio management a. Duration b. Immunization c. Asset-Liability management d. Convexity 

4. Interest rate derivatives a. Forward Rate Agreements i. Hedging with FRA ii. Pricing FRA b. Interest rate swaps i. Hedging with IRS ii. Pricing IRS iii. The swap curve iv. Asset-Liability management with IRS c. Forward contracts i. Hedging with Forward contracts ii. Pricing Forward contracts d. Interest rate futures i. Eurodollar futures

5. Hedging with Eurodollar futures 2. Extending the LIBOR zero curve ii. Treasury bond futures 1. Cheapest to deliver 2. Hedging with T-bond futures e. Interest rate options i. Bond options ii. Caps and floors