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Theories of fixed income securities, term structure of interest rates; asset pricing models, valuation of fixed income securities and contingent claims, fixed income portfolio management, immunization strategies, yield curve analysis.

Compared to the early 1980s when the fixed income market was comprised of bonds of simple structures, today the market is comprised of more complex bond structures with embedded options that make bond valuation more difficult. The markets for fixed securities represent important business and investment opportunities for insurance companies, investment banks, other financial institutions, and non-financial corporations. With increased volatility of interest rates, students and investors must understand the techniques for valuing these complex securities and how other derivative securities in the markets can be used to manage interest rate risk of fixed-income portfolios. The objective of this course is to equip students with principles and tools which allow them to tackle realistic valuation of fixed-income securities and risk management of bond portfolios. Topics include structure of fixed-income markets; the institutional framework of fixed-income markets; size markets; instruments traded; market conventions; financial innovation and the bond market; the term structure of interest rates, determinants of term structure of interest rates; sport and forward rates; arbitrage restrictions on interest rates; yield curves, bond pricing rates, and conventional yields; zero-coupons; coupon-bearing bonds; non-callable bonds; callable bonds treasury and quasi government instruments treasury securities; stripped securities; federal agency securities; corporate debt instruments, corporate bonds; medium term notes; commercial paper; municipal securities, investors in municipal securities; features, municipal money market products; municipal derivative securities; mortgages and mortgage pass through securities; fixed rate mortgage; mortgaged pass through securities; collateralized mortgage obligations; risk management techniques, duration and convexity; using duration in hedging; limitations of duration; immunization strategies; bond investment risks and portfolio strategies; price volatility; arbitrage strategies; zero-coupon strategy; active portfolio strategies; and dedicated portfolio strategy.

Prerequisites: FIN:3000 and FIN:3100