Fixed Income Securities: Theory and Applications


Prerequisite/Recommended prerequisite for participation in the module

The prerequisite for participating in this module is an enrollment at the Master of Science (MSc) in Economics and Business Administration (Finance).

Content, progress and pedagogy of the module

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.

Learning objectives


The objective is that the student after the module possesses the necessary knowledge on: 

  • various techniques to construct the zero-coupon discount curve using market prices and the implications of the assumptions behind each technique. 
  • selected term structure models and theories, their link to different interest rate pricing models, their assumptions, their asset pricing implications, and their predictions on the behavior of interest rates.
  • different derivative securities, their payoffs, their pricing and their potential use to construct mitigation strategies for interest rate and credit risk management.


The objective is that the student after the module possesses the necessary skills to: 

  • comparing selected models of the term structure of interest rates, and derive the prices of selected interest rate securities including various derivatives securities.
  • comparing and distinguishing between various term structure and fixed income pricing models, as well as reflecting on their implications for understanding the behavior of interest rates.
  • constructing hedging strategies that reduce the exposure to interest rate and credit risk using fixed income securities.


The objective is that the student after the module possesses the necessary competences to: 

  • comparing and appling different methods to construct the yield curve from data on coupon market prices, calculate the theoretical price of a bond, and reflect on the implications of using the different techniques introduced during the module.
  • applying and reflecting on various methods for extracting discount and interest rate curves from market prices.
  • assessing and quantifing the risks associated with different fixed income instruments and construct appropriate strategies to hedge the exposure of portfolios to interst rate and credit risk.

Type of instruction

For information see § 17.



Name of examFixed Income Securities: Theory and Applications
Type of exam
Oral exam based on a project
Individual examination.
AssessmentPassed/Not Passed
Type of gradingInternal examination
Criteria of assessmentThe criteria of assessment are stated in the Examination Policies and Procedures

Facts about the module

Danish titleFastforrentede værdipapirer: teori og anvendelse
Module codeKAFIN202211
Module typeCourse
Duration1 semester
Language of instructionEnglish
Location of the lectureCampus Aalborg
Responsible for the module


Study BoardStudy Board of Economics and Business Administration
DepartmentAAU Business School
FacultyFaculty of Social Sciences and Humanities