International financial markets
Prof. David T. Brown
COURSE AIMS
Fixed income securities can be characterized by (1) the maturity of the instrument, (2) the credit risk of the issuer and (3) any embedded options allowing the issuer to call the obligation. Investor valuations depend on their views about (1) future interest rates, (2) the probability the issuer defaults and recovery rates in default, and (3) the volatility of interest rates. This course is designed to show how investor views translate into relative value assessments and portfolio positions in both portfolios managed against a benchmark index and portfolios managed with focused on a liability.
COURSE CONTENT
– Expected Returns and Yields. [Fabozzi Chapters 2 and 3]
– Stripped Spreads.
– Forward Rates and Maturity Selection. [Fabozzi Chapter 5]
– Forward Rates and Curve Strategies.
– Credit Risk Valuation. [Fabozzi Chapters 7 and 20]
– Credit Risk Models and Recovery Rates.
* Default & Recovery Rates of European Corporate Bond Issuers, 1985-2001. * The Determinants of Recovery Rates in the US Corporate Bond Market.
– Credit Default Swaps. [Fabozzi Chapter 29]
* Empirical Study of Liquidity Effects in the Relation between Corporate Credit Spread and Credit Default Swaps.
* The J.P. Morgan Guide to Credit Derivatives.
* The CDS-Bond Basis during the Financial Crisis of 2007-2009.
– Callable Bonds. [Fabozzi Chapter 17]
– Mortgage Backed Securities. [Fabozzi Chapter 18]
– Liability Driven Investing. [Fabozzi Chapter 24]
– Currency Strategies.
* Do Professional Currency Managers Beat the Benchmark?
* The Currency Denomination Decision: Do Firms Seek Bargains in International Bond Markets?
* Anomalies: Foreign Exchange.
– Final Exam.
READING LIST
The lecturer will provide a lecture note and PowerPoint presentation for each lecture. Some additional readings are provided for most lectures. The readings titled “Fabozzi” refer to Bond Markets, Analysis, and Strategies, by Frank J. Fabozzi.
TEACHING METHOD
Classroom lectures.
ASSESSMENT METHOD
The course grade will be determined by the student’s performance on two homework assignments and a final exam.
Date / Percent of Course GradeHomework One / Due on 5/12 / 30%
Homework Two / Due on 5/19 / 30%
Final Exam / 5/22 / 40%