This course equips students with the tools required to understand the construction, the pricing and the risks of bonds and fixed income derivatives. The essential building block for understanding fixed income securities is interest rates. Interest rates are paid to the bond holders in the form of coupons, and interest rates are central to the present value concept used for pricing, valuation, and risk measurement. Financial institutions also issue a range of derivatives with different types of interest rates as underlying assets. Students of this course learn how to use such derivatives, including forward rate agreements, interest rate futures, options, and swaps, to manage the interest rate risk of a portfolio. They also learn how interest rates reflect monetary policy. As fixed income securities involve extensive material of quantitative nature, the course includes computer-based exercises and assignments as a complement to the concepts covered in lectures.

The overall aim of this course is to equip students with the tools required to understand the construction, the pricing and the risks of fixed income securities. Upon completion of the course, students should be able to:

Knowledge and understanding

1. Understand how and why various features of fixed income securities influence their pricing and risk. This includes both a theoretical understanding and recognition of how technical features influence the practice of pricing and risk management.

Skills and abilities

2. Implement scientific methods to quantify and analyse the price and value, as well as the duration and convexity of fixed income securities. Students should also be able to use the fixed income securities to examine the status of market-wide interest rates and to manage interest rate risk.

Judgement and approach

3. Critically assess and evaluate the theoretical and empirical issues in fixed income securities and interest rate risk management.