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Rutgers University Newark, Fall 2010

Analysis of Fixed Income ( 22:390:611:30)

Professor Francis K.W. Ng

Time: Monday 8:30 AM - 11:20 AMPlace: 1WP-120

Contact: kimng@andromeda.rutgers.edu

Office Tel: 973-353-5732 / Cell: 201-463-8362

Office Hours: Thursday 1pm to 2pmOffice: 1150, 1WP

Course Overview and Objectives

This course is a quantitative course on fixed income analysis. It begins with bond

mathematics, and continues with yield curve modeling, interest-rate risk, tools for fixed

income portfolio management, embedded option pricing, arbitrage strategies and ends withcredit risk modeling. Students will be familiar with various types of bond instruments such

as Convertible, Callable bonds, PIK, MBS, CMO, Senior-Subordinate bonds and CDS. In

addition, students will be heavily exposed to the tools available in the Bloomberg system.Students will be able to see how practitioners use these tools in decision making.

This course is fundamental to students who are serious in pursuing a career directlyrelating to quantitative modeling of fixed income products.

Course Materials

Lecture notes and case materials will be distribute via Blackboard.

Main textbook:Fixed-Income Securities Valuation, Risk Management and Portfolio

Strategies by Lionel Martellini, Philippe Priaulet and Stephane Priaulet.

Publisher: Wiley Finance ISBN 10-470-85277-1 (paperback)

Students should be familiar with algebra, calculus, Excel and VBA

Grades

Midterm: 50%Final: 50%

Course Outline

Week 1 Chapter 1Bond and Money Market pricing conventions.Bloomberg DES screen and terminology.T-bill discount, CD yield, Accrued Interest, Price quotes and Repo market.

Week 2 Chapter 2Bond Mathematics.

mailto:kimng@andromeda.rutgers.edumailto:kimng@andromeda.rutgers.edumailto:kimng@andromeda.rutgers.edu

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Newton-Ralphson algorithm

Week 3 Chapter 3Term Structure Theories and Empirical properties

Principal Component Analysis

Week 4 Chapter 4 & 12Zero curve and forward curve constructions

Model yield curve dynamicsPolynomial Splines and Nelson-Siegel

Week 5 Chapter 5Interest-rate risk. Duration and convexity.

Week 6 Handout & Chapter 6Hedging with key rate durations

Week 7 Midterm

Week 8 Chapter 7Passive Fixed-Income Portfolio Management

Case Study on passive portfolio

Week 9 Case PresentationArbitrage Strategies

Week 10 Chapter 8Active Fixed-Income Portfolio Management

Week 11 Chapter 9Performance measurement and alphas

Case Study on performance measures

Week 12 Handout, Chapters 17, 18MBS, CMO and Senior-SubordinatePrepayment, default and waterfall process

Week 13 Handout, Chapter 14

Embedded options in bonds

OAS and OA risk sensitivities.

Week 14 Chapter 13Modeling Credit Spreads Dynamics

Week 15 HandoutPricing CDS

Week 16 Final Exam

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References:

Anderson, G.A., J.R. Barber, and C.H. Chang [1993], Prepayment Risk and the Duration ofDefault Free Mortgage Backed Securities, Journal of Financial Research 16(1), 1-9.

Barber, J.R., and M.L. Copper [1996], Immunization using Principal Component Analysis,Journal of Portfolio Management 23(1), 99-105.

Grieves, R. [1999], Butterfly Trades, Journal of Portfolio Management 26(1), 87-95

Ho., T.S.Y. [1992], Key Rate Durations: measures of interest rate risks, Journal of Fixed

Income, 2(2), 83-92.

Mc Culloch, J.H. [1971], Measuring the Term Structure of Interest Rates, Journal of Business,44, 19-31

Merton, R.C. [1974], On the pricing of Corporate Debt: the risk structure of interest rates,Journal of Finance, 29, 449-470

Nelson C.R., and A.F. Siegel [1987], Parsimonious Modeling of Yield Curves, Journal ofBusiness, 60(4), 473-489.

Roll, R. [1992], A Mean/Variance Analysis of Tracking Error. Journal of PortfolioManagement 18(4), 13-22.

Vasicek, O.A. [1977], An Equilibrium Characterization of the Term Structure, Journal ofFinancial Economics, 5, 177-188.