Newcastle University

Aims

The module aims to familiarise with the basic issues related to the fixed income securities, their features, valuation and investment. It further aims at providing a critical understanding of the functioning of bond markets and of principles for effective financial decision making in bond investment.
At the end of this module, successful students will be able to:
-Demonstrate knowledge of the functioning of bond markets and different instruments
-Understand the analytics of bond pricing
-Evaluate and interpret the term structure of interest rates
-Interpret and empirically test fixed icnome portfolio strategies and manage the associated risks

Original Summary:
This module provides students with knowledge of the Fixed Income Securities market. This market is one of the most active securities markets, with continuous innovation in products and techniques. Students will learn about the different sectors of the bond market, analyse bond prices and yields, and measure the risk - duration and convexity. The modelling of the term structure of interest rates, as well as the investment and risk management of bond portfolios will be also part of the topics covered in the module.

The module starts at the introductory level but moves quickly to advanced levels, giving students a thorough grounding in standard theory and plenty of leads to follow recent developments. The theory will be illustrated with empirical evidence. Suggestions for potential topics in PG dissertations will be also provided.

Seminars and case studies will allow the students to familiarise themselves with the application of the techniques discussed during the lectures.

Outline Of Syllabus

MODULE CONTENTS

1. Introduction and pricing of bonds (FF1-2)
2. Bond yields and measures of risk – duration and convexity - (FF3-4)
3. Term structure of interest rates (FF5)
4. Bond market sectors:
      a. Default-free bonds (FF6)
      b. Corporate bonds (FF7)
      c. Municipal and Foreign Bonds (FF8-9)
      d. Mortgage and Asset-Backed securities (FF10-13)
5. Bonds with embedded options (FF18)
6. Portfolio management strategies and risk management for bond portfolios (FF19-22)

Teaching Rationale And Relationship

Lectures convey the underlying economic theory and quantitative techniques on which the analysis of fixed income securities is based. Practical application of theoretical concepts is delivered in the seminars and computer classes. The learning process can also be supported by the discussion of case studies.

Assessment Rationale And Relationship

The written (unseen) examination tests the knowledge and understanding of the theory and practice of bond valuation and investment, students’ familiarity with the latest academic and practical developments relevant to this subject area, and understanding of the limits of bond valuation and risk hedging techniques. It further tests the skill to develop a bond investment strategy which would take account of the risks discussed in this module.


The final (unseen) examination is mainly designed to assess theoretical understanding, problem solving skills under time-constraint, as well as quantitative skills that students should have acquired by attending the module.