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The market for fixed income products is huge and ever growing. Throughout the 2007–2009 financial crisis, the 2008–2009 recession and the crisis in the Eurozone, debt markets have been in the spot light. Central banks have been trying to fight the crisis with aggressive expansionary monetary policy and by greatly expanding their balance sheets. Public debt is mounting at a staggering rate and US government debt is projected to reach possibly 80% of GDP by 2019.
In this environment, it is indispensable to have a thorough understanding of the functions and objectives of the major players in debt markets, of the various fixed income instruments and the risks associated with them, and of the models and methods used to value fixed income securities and their derivatives.
This course helps to develop the relevant knowledge and understanding of fixed income instruments and interest rate models for students aiming for a career in the fixed income field. The course will provide an overview of the major institutions, organisations and investors, and the recent developments in fixed income, covering both theoretical background and practical implementation. We will discuss traditional debt instruments (namely government and corporate bonds) and fixed income derivatives (including mortgage-backed securities), develop the theories for valuing them and study the determinants of risk and return of fixed-income securities. To this end, we will cover the most important state-of-the-art interest rate models such as the Vasicek, Ho and Lee, or Black-Derman-Toy models; we also develop their theoretical underpinnings and provide examples for the practical implementation. Furthermore, we will take a closer look at the interdependencies and the roles of the different players in the debt markets. In particular, we will examine the role of and the instruments available to the central bank in setting interest rates. The major focus of the course will be on economic intuition and on understanding the products and interrelationships in the fixed income markets. We will relate the course topics to the credit crisis of 2007-2009 and discuss implications for the future of debt markets. |
