This module focuses on the pricing of fixed income securities and associated risk management strategies to reduce interest rate risk. Examples of fixed income securities include pure discount bonds, coupon-bonds such as Treasury notes and corporate bonds, floating rate notes, callable bonds, etc., issued by public or private entities.
The module is offered as an elective to the second year students in the Master’s in Finance. Hence, students taking this module are expected to be already familiar with basic concepts in fixed income, such as the time value of money, calculation of interest rates at different compounding frequencies, yields, holding-period returns, forward interest rate, as well as risk management concepts like duration, convexity and immunization. Students are also required to have an understanding on the basic structure and payoffs of derivative securities, and valuation concepts at the level of the Black-Scholes theory.
The first part of the module introduces different methods to construct the zero-coupon yield curve from market prices of coupon-bonds. We study the determinants, predictions and empirical validity of the term structure of interest rates and focus on different valuation models of fixed income securities (e.g. Black-Derman-Toy, Vasicek, Cox-Ingersoll-Ross, etc.) alongside the binomial tree and Monte Carlo simulation methods for their implementation. The second part of the module provides a comprenhensive overview to various interest rate derivatives, such as interest rate swaps, bond options and interest rate options, e.g., caps, floors and swaptions, their valuation and how can they be used for interest rate risk management purposes. Finally, the module addresses the valuation and risk management of credit risk in fixed income markets. In particular, we discuss the valuation of credit default swaps (CDS) and collaterized debt obligations (CDOs), and how the latter is related to process of securitization of asset-backed securities (ABS), including mortgage-based securities (MBS). During the module students will use real world data on fixed-income prices and yields and standard software (e.g. Excel, R, etc.) to apply the tools developed during the course, in particular for the pricing of different assets and for the construction of the term structure of interest rates. The necessary data can be accessed online or downloaded from any of the financial data platforms offered by AAU.
The objective is that the student after the module possesses the necessary knowledge on:
The objective is that the student after the module possesses the necessary skills to:
The objective is that the student after the module possesses the necessary competences to:
For information see § 17.
|Name of exam||Fixed Income Securities: Theory and Applications|
|Type of exam|
Oral exam based on a projectIndividual examination.
|Type of grading||Internal examination|
|Criteria of assessment||The criteria of assessment are stated in the Examination Policies and Procedures|
|Danish title||Fastforrentede værdipapirer: teori og anvendelse|
|Language of instruction||English|
|Location of the lecture||Campus Aalborg|
|Responsible for the module|
|Study Board||Study Board of Economics and Business Administration|
|Department||AAU Business School|
|Faculty||Faculty of Social Sciences and Humanities|