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Fixed Income Securities

Dr H. K. Pradhan

Objectives:This course is intended to analyze the fixed income securities markets

and its implications for investments. It will analyze the marketcharacteristics, instruments, selling techniques, pricing and valuationissues, floating rate instruments, risk and return of fixed incomesecurities, portfolio management techniques, term structure modeling,corporate debt and convertibles, bonds with embedded options, sub-national debt analysis, credit risk analysis, and interest rate riskmanagement with swaps, options and futures. The course intends tocover the specific features of the Indian Fixed Income SecuritiesMarkets. The course will construct several Excel based techniques toanalyze bond cashflows analytics.

Course Structure:The course will include lectures, bond cash flows analysis, term paperassignments and class exercises.

Contents:Lecture 1: Indian Fixed Income Markets, Institutional Arrangements,Market Participants and Instruments, Investors Perspectives, MarketConventions, Debt Management & Monetary policies

Lecture 2: Bond Valuation, Time Value of Money, Price and YieldConventions, Bond Valuation using Yield Curve, Yield & return, horizonreturn; Valuation of Repo & Reverse Repo

Lecture 3: Valuation of other Bonds: Floating Rate securities, Inflationindex bonds, bonds with embedded options

Lecture 4: Introduction to Bloomberg, Interpretations of Fixed IncomeInstruments using Bloomberg Templates, Understanding Market Quotesand Conventions

Lecture 5: Corporate Bonds, Valuation, Implications for Rating &Migration, Investment Grade and Low Rated Bonds, Valuation ofConvertibles

Lecture 6 & 7: Risk Identification in Bonds: Duration, Convexity, andPortfolio Immunization

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Lecture 8 : Yield Curve Analysis, Par Bootstrapping, Modeling YC usingNelson-Seigel and Spline Methods, Spot & Forward rates, , Valuation ofSTRIPS

Lecture 9: Term Structure of Interest Rates theories; Interest Rate

Models (Cox-Ingersoll-Ross, Vasicek, HJM Model)

Lecture 10: Government Securities Auction, Market Implications, WIMarkets, Auction & Primary Dealers

Lecture 11: Auction & Bidding: Game (students play bidding game andtrade online in Computer Lab)

Lecture 12: Bond Portfolio Construction & Management; Bullet, Barbell& Ladder Strategies, Construction of Bond Portfolio; Portfolio withCorporate Bonds

Lecture 13, 14 & 15: Interest Rate Derivatives: FRAs, Swaps, Futures,Options, Eurodollar Futures, OIS(Overnight Index Swaps), OIS Trading &Arbitrage

Lecture 16: Bonds with embedded options, BDT Model(ModelingInterest Rate Tree)

Lecture 17: Mortgage-Backed Securities, Prepayments, Option Adjusted Spreads(OAS)

Lecture 18: Credit Derivatives, Valuation of Credit Default Swaps, Indian

CDS

Lecture 19 & 20: Assignment Discussions & Presentations

Evaluation CriteriaQuizzes/Mid Term 40%End term 30%Exercise/Assignment 20%Class Exercise 10%

Readings:

1. Bond Markets : Analysis And Strategies, 5Ed , Fabozzi, PearsonEducation, 7th Edition

2. Fixed Income Markets and Their Derivatives, Suresh Sundaresan, Academic press, 3rd3. Debt Market Handbook by FIMMDA & National Stock Exchange of

India Ltd. (NSE)

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Other handouts:The course will provide several articles in debt and fixed income

securities, circulars of RBI and FIMMDA, empirical techniquesdealing with bond management, as well as my presentations,excel spreadsheet calculations, valuation templates from

Bloomberg as well as web resources.

Expectations: My expectation is that students work hard during thecourse, understand bond mathematics, how Indian bond market worksand its implications on fixed income investing as an asset class, andportfolio implications for banks and financial institutions.