Fixed Income Valuation and Investment Analysis
Fixed Income Valuation and Investment Analysis
Professor Haiyun Zhang.
Course Office:1023 Keyan Building, University of International Business and Economics, 10 Huixindongjie, Chaoyang District, Beijing, 100029. Email address is: zhanghaiyun@uibe.edu.cn.
Course Description
This is a three-credit course designed for third-year undergraduate students majoring in Finance.
Advances in the bond and derivatives markets over the past three decades have transformed the fixed income sector from a moribund backwater in finance into one of the most fascinating frontiers of financial innovations. With intertwined complexities in product structure, market dynamics and analytical techniques, fixed income analysis is both a science and an art. This course equips the students with the analytical framework, product knowledge and market intuition to navigate through the complexities of this highly sophisticated discipline, laying the groundwork for continuous learning to stay ahead in the fast changing world of fixed income investment.
Fixed income investment professionals must pick longs and shorts among a multitude of bonds with myriad variations in cash flow structure, embedded options, credit profiles and other characteristics. For each bond, the investor must ask, “Is this bond overvalued or undervalued?” To help answer this question, there are many methods and criteria that look at value and yield from different angles. In this course students will learn about the full array of valuation conceptions and tools, and the rationale, usage, advantages and limitations of each tool in the bond valuation toolkit.
An oft-quoted aphorism in the investment world is “watch the downside, the upside will take care of itself”. A successful fixed income investor must be adroit in managing the many risks associated with bond portfolios, such as interest rate risk, yield curve risk, call and prepayment risk, reinvestment risk, credit risk, liquidity risk, currency risk, inflation risk, volatility risk, event risk, and sovereign risk. This course will help students assess these risks and quantify interest rate and yield curve risks in single bonds and portfolios.
Methods and analytical tools are most effectively learned in the context of real-world practices and applications. This course takes an application-oriented approach to help students appreciate and understand the rich texture of fixed income valuation and investment analysis from the perspectives of products and market segments.
While China’s bond market is still in its early stage of development, its growth over the last decade has been nothing but breathtaking, and its further development remains a top priority in China’s financial reform. China’s fixed income sector faces many unique challenges whose solutions lie in creative adaptations rather than simple replications of western paradigms. In line with the philosophy of “global vision, local insight”, an important component of this course is a term project that compares the domestic and international fixed income markets.
Course Objectives
1. To develop your capacity to identify and assess the value drivers and risk factors in fixed income instruments and portfolios.
2. To build your skills in conducting in-depth qualitative and quantitative analysis to support fixed income investment decisions in the context of your liability structure, liquidity needs, risk appetite, and characteristics of your existing portfolio.
3. To help you master a full set of analytical tools to evaluate the value, return, and risk of fixed income instruments and portfolios.
4. To give you hands-on experience in crafting investment strategies and tactics by assessing risk and return, identifying arbitrage opportunities, and evaluating relative values.
5. To acquaint you with the product features and market mechanisms in the fixed income world, show you how those features and mechanisms impact the value and risks of fixed income instruments, and provide you with the analytical framework for assessing and quantifying such impacts.
6. To heighten your awareness of country-specific aspects of the fixed income sector and deepen your understanding of China’s fixed income market.
7. To strengthen your proficiency in research, writing and presentation, with a fixed income focus and an English language environment.
Textbook
Frank J. Fabozzi, “CFA Fixed Income Analysis”, 2nd Edition, (JohnWiley & Sons, 2007)
姚长辉，《固定收益证券——定价与利率风险管理》，北京大学出版社，第2版，2013年
Reference Books
1.Frank J. Fabozzi, Steven V. Mann,“The Handbook of Fixed Income Securities”，8th Edition,(McGraw-Hill, 2012);
2.Pietro Veronesi, “Fixed Income Securities: Valuation, Risk, and Risk Management”, (JohnWiley & Sons, 2010);
3. Donald J. Smith, “Bond Math: The Theory Behind the Formulas”, (Wiley Finance, 2011).
Grading
In-class discussion and homework assignment 20%
Term project 40%
Final examination 40%
Term Project
The term project is mainly a team-based research effort that compares China’s fixed income market with international fixed income markets. The comparison can be made from a perspective of your choice, such as general market functions, products, market participants, issuers, intermediaries, regulations, investment analysis, risk management, and specific aspects of certain products. You and your team members are expected to write an in-depth research paper and prepare a corresponding PowerPoint presentation. You and your team will be asked to deliver your presentation in class and answer questions related to your presentation. Both the research paper and the PowerPoint presentation must be written in English.
Your grade on the term project will be based on six factors:
1.The originality, soundness and thoroughness of the overall framework and design of your research project - 15%,
2.The depth and breadth of your team’s analysis and demonstrated ability to use conceptual and analytical tools to support your analysis - 20%,
3. The clarity and persuasiveness with which you articulate the logic and reasoning in your research - 20%,
4. The correctness and adequacy of the supporting data - 20%,
5. The professionalism demonstrated in the formatting and preparation of the research paper and the PowerPoint presentation- 15%, and
6. The degree of preparation, professionalism, energy, enthusiasm, and skills demonstrated in delivering the presentation and answering the questions - 10%.
Chapters to be covered in class
Fabozzi，“CFA Fixed Income Analysis”
Chapter 1 Features of Debt Securities
Chapter 2 Risks Associated with Investing in Bonds
Chapter 3 Overview of Bond Sectors and Instruments
Chapter 4 Understanding Yield Spreads
Chapter 5 Introduction to the Valuation of Debt Securities
Chapter 6 Yield Measures, Spot Rates, and Forward Rates
Chapter 7 Introduction to the Measurement of Interest Rate Risk
Chapter 8 Term Structure and Volatility of Interest Rates
Chapter 9 Valuing Bonds with Embedded Options
Chapter 10 Mortgage-Backed Sector of the Bond Market
Chapter 11Asset-Backed Sector of the Bond Market
姚长辉，《固定收益证券——定价与利率风险管理》
Chapter 1 固定收益概述
Chapter 2 到期收益率与总收益分析
Chapter 3 零息债券与附息债券分析
Chapter 4 持续期与凸性
Chapter 8 含权证券的价值分析
Chapter 9 资产证券化
Course Schedule(Wednesday 09:50 - 12:10 )
08/31, Topic: Introduction to the course and to features of debt securities
References: Fabozzi：1, 姚长辉：1.1-1.2
Assignments: Team formation, project selection, and reading notes
09/07, Topic: Introduction to the valuation of debt securities
References: Fabozzi：5, 姚长辉：2.1-2.3
Assignments: Team formation and project selection due
09/14, Topic: Introduction to yield curves and credit spreads
References: Fabozzi：4, 姚长辉：2.3
Assignments: Calculation problem set 1
09/21, Topic: Introduction to interest rate risk measurement, Q&A on reading notes
References: Fabozzi：7, 姚长辉：4
Assignments:Reading notes due, write initial plan
09/28, Topic: In-depth discussion of interest rate risk measurement, Q&A on Reading Notes
References: Fabozzi：7, 姚长辉：4
Assignments: Calculation problem set 2
10/05, Topic: Bond arbitrage, Q&A on reading notes
References: Fabozzi：5；姚长辉：3
Assignments: Calculation problem set 3
10/12, Topic: Bond arbitrage, Introduction to default analysis, Q&A on Initial Plans
References: Fabozzi：5；姚长辉：3
Assignments:Initial plans due, write progress review
10/19, Topic: Debt investment yield and return analysis, Q&A on Progress Reviews
References: Fabozzi：6, 姚长辉：2.4-2.5
Assignments: Continue writing progress review
10/26, Topic: In-depth discussion on debt features and their valuation implications, Q&A on Initial Plans
References: Fabozzi：1 & 9, 姚长辉：1.1-1.2 &8
Assignments:Progress reviews due, write final deliverables
11/02, Topic: Risks Associated with Investing in Bonds, Q&A on Progress Reviews
References: Fabozzi：2, 姚长辉：1.3
Assignments: Continue writing final deliverables
11/09, Topic: Bond Sectors and Instruments and analysis of tranched products, Q&A on Progress Reviews
References: Fabozzi：3, 姚长辉：1.5
Assignments: Continue writing final deliverables
11/16, Topic:Default analysis in structured products, Q&A on Progress Reviews
References: Fabozzi：10、11, 姚长辉：9
Assignments: Continue writing final deliverables
11/23, Topic: Bond mathematics, Q&A on Progress Reviews
References: Fabozzi：1-11, 姚长辉：1-4, 8-9
Assignments: Continue writing final deliverables
11/30- Topic: Term project presentation and discussion
12/21References: Fabozzi：1-11, 姚长辉：1-4, 8-9
Assignments: Final deliverables due
12/28, Topic: Review of the course
References: Fabozzi：1-11, 姚长辉：1-4, 8-9
Assignments: None
Note: This Course Schedule May be Altered during the Semester
