Fall 2000, Term 2
Finance 450: Fixed Income Securities and Risk Management
Professor David A. Hsieh
Last Update: Sep 20, 2000.
Fixed Income Securities and Risk Management (previously known as Money
and Capital Markets) deals with the theory and application of interest
rates and fixed income securities. The course is designed to be taken after
the core finance course (Finance 350) and Derivatives (Finance 353).
The text book is Bond Markets, Analysis and Strategies by Frank
Fabozzi, Prentice Hall, fifth edition. Additional required readings are
distributed in a course pak.
The major topics are:
Term Structure of Interest Rates: This refers to the level of interest
rate at different maturities. We will cover three types of term structures
-- the yield curve of coupon bonds, the zero coupon yield curve, and the
forward rate curve. How are they calculated? What are their uses?
Interest Rate Risk Management Concepts: We will learn the concepts
of duration, convexity, and value-at-risk. These concepts allow us to understand
how much the value of a bond (or a portfolio of bonds) more when interest
Risk Management Tools: To management interest rate risk, we consider
a number of exchange traded and over-the-counter financial instruments,
such as interest rate futures, options, swaps, caps and floors.
Models of Interest Rates: Pricing interest rate related securities,
specially complicated derivatives, requires models of interest rates. We
learn about simple (one-factor) models of interest rates, such as Black-
Derman-Toy, and touch on complicated (multi-factor) models of interest
rates, such as Heath-Jarrow-Morton and Hull-White.
Mortgages: We study simple home mortgages, mortgage pass through
securities, and some standard mortgage derivatives such as interest only
and principal only mortgage bonds.
Corporate Debt: In this topic, we will examine defaultable bonds,
including high yield bonds.