# Fixed Income Securities

## Objetivos

This course discusses the most important securities traded in fixed income markets, the valuation models used to price them and the portfolio strategies that may control interest-rate risk and/or enhance returns. We analyze the payoff characteristics and quotation conventions of a wide range of fixed income securities, from zero-coupon government bonds, coupon-bearing government bonds and corporate bonds with simple cash-flow structures to securities with increasingly complex cash-flow structures such as floating-rate notes, callable bonds, inflation-linked bonds, Longevity Bonds, Mortgage-Backed Securities and interest rate derivative securities like FRAs, Futures, Interest Rate Swaps (IRS), Caps & Floors, Swaptions, Futures and options on bonds. We explain the methods used for estimating the yield curve (bootstrapping, Nelson-Siegel-Svensson, Splines) and for modeling the yield curve dynamics (e.g., Ho-Lee and Black-Derman-Toy models). We develop the tools to analyze interest-rate sensitivity (e.g., duration, convexity, M-squared) and value fixed-income securities, and discuss the use of active and passive portfolio strategies to control interest-rate risk and/or enhance returns, including hedging and immunization strategies.

## Caracterização geral

##### Código

400097

##### Créditos

7.5

##### Professor responsável

Jorge Miguel Ventura Bravo

##### Horas

Semanais - A disponibilizar brevemente

Totais - A disponibilizar brevemente

##### Idioma de ensino

Português. No caso de existirem alunos de Erasmus, as aulas serão leccionadas em Inglês

### Pré-requisitos

NA

### Bibliografia

**I. MAIN**

- Petitt, B, Pinto, J. & Pirie, W. (2015). Fixed Income Analysis, 3rd Edition. John Wiley & Sons, Inc. - CFA Institute Investment Series, New Jersey
- Martellini, L., Priaulet, P. e Priaulet, S. (2003). Fixed-Income Securities: Valuation, Risk Management and Portfolio Strategies. John Wiley & Sons.

**II. AUXILIARY**

- Bravo, J. M. (2001). Modelos de Risco de Taxa de Juro: Estratégias de Cobertura e Imunização. Dissertação de Mestrado em Economia Monetária e Financeira, ISEG-UTL (portuguese).
- Choudhry, M. (2001). The Bond and Money Markets: Strategy, Trading, Analysis. Butterworth-Heinemann
- Fabozzi, Frank J. (2016). Bond Markets, Analysis and Strategies, 9th Ed. Pearson.
- Hénaff, P. (2013). Topics in Empirical Finance with R and Rmetrics. Rmetrics Association & Finance Online Publishing, Zurich
- Sundaresan, Suresh (2001). Fixed Income Markets and Their Derivatives. 2nd Ed Southwestern
- Tuckman, Bruce (2002). Fixed Income Securities: Tools for Today¿s Markets. 2nd Ed (University Edition), Wiley Finance.
- Veronesi, P. (2011). Fixed income securities: valuation, risk, and risk management. John Wiley & Sons.

### Método de ensino

- Expositional and Questioning Method Active Methods and Case Studies
- Investigation projects and practical applications.
- Knowledge development and learning capability.

### Método de avaliação

The final grade for Exam Seasons 1 & 2 & all Special exams is computed as follows:

- Group Cases and Problem sets: 60%
- Individual Project / Exam: 40%

## Conteúdo

**Basics of Fixed Income Markets and Securities**

- Overview of Fixed Income Markets
- Bonds and Money-Market Instruments
- Bond Prices and Yields
- Analytics of fixed income markets

- Pricing of Fixed-coupon bonds
- Pricing of Floating-rate bonds
- Rating, credit risk and valuation of defaultable bonds

**Term structure of interest rates**

- Spot and forward interest rates
- Empirical Properties and Classical Theories of the Term Structure
- Deriving the Zero-Coupon Yield Curve

- Bootstrapping
- Nelson-Siegel-Svensson models
- Cubic splines

**Bond Portfolio Interest Rate Risk Management**

- Duration, Convexity, M2, M-Absolute, Key-rate durations, Duration vectors, parametric duration/convexity & beyond
- Hedging Strategies against parallel and non-parallel interest rates risk shifts
- Active Fixed-Income Portfolio Management
- Interest Rate Risk Immunization Strategies & Asset-Liability Management

**Interest Rate Derivatives**

- Forward Rate Agreements: Mechanics, Pricing and Hedging
- Interest Rate Swaps (IRS)

- Swaps and Swap-Related Products and Terminology
- Pricing and Market Quotes, the swap yield curve
- Interest Rate Risk management with IRS

- Interest rate futures

- Eurodollar futures
- Treasury bond futures
- Mechanics, Pricing and Hedging

- Modeling the Yield Curve Dynamics

- The Binomial Interest-Rate Tree Methodology
- Continuous-Time Models

- Risk neutral pricing and Monte Carlo Simulations
- Interest rate options