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AF 225: DEBT MARKETS Course Outline 2010

Instructors: Dr Xiaoji Lin Dr Philippe Mueller Session: Objectives: This course is intended to give an understanding of the instruments, the major institutions, organizations and investors, and the recent developments in the fixed income field. We will cover traditional debt instruments (namely Government and corporate bonds) and fixed income derivatives, develop the theory for valuing them and study the determinants of risk and return of fixed-income securities. Throughout the course, we will relate to the current credit crisis and discuss what has happened over the past two years and the implications for the future of debt markets. We will also discuss fixed-income portfolio management and the role of fixed-income securities in risk management. 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 available instruments to the central bank in setting interest rates. The major focus of the course will be on the economic intuition and on understanding the products and interrelationships in the fixed income markets. Prerequisites: Basic mathematics, and statistics, introductory finance Readings: Two

Much of the relevant material will be covered in the lecture notes. In addition, the following two books deal with a substantial part of the material covered in this course.
Frank Fabozzi, Bond Markets, Analysis and Strategies, 7th edition, Prentice Hall, 2010. Suresh M. Sundaresan, Fixed-Income Markets and Their Derivatives, 3rd edition, Academic Press, 2009.

Additional selected readings will be assigned for individual topics.


Assessment: Two written examinations.

Course Outline 2010 Topic 1 Introduction and overview of debt markets with a particular focus on the US and the UK: organization, players, institutions and instruments. Supplementary reading: Fabozzi, Chapter 1; Sundaresan, Chapters 1, 4. Pricing of bonds, measuring yield and market conventions. Supplementary reading: Fabozzi, Chapters 2, 3. Bond price volatility and term structure of interest rates. Supplementary reading: Fabozzi, Chapters 4, 5. Treasury and agency securities, sovereign debt. Supplementary reading: Fabozzi, Chapters 6, 9; Sundaresan, Chapters 6, 13. Corporate debt instruments and municipal securities. Supplementary reading: Fabozzi, Chapters 7, 8. Securitization. Supplementary reading: Fabozzi, Chapters 10 16. Convertible bonds and fixed-income derivatives. Supplementary reading: Fabozzi, Chapters 20, 2729; Arzac, Enrique, 1997, PERCS, DECS, and other Mandatory Convertibles, Journal of Applied Corporate Finance 10, 54-63. Credit risk and credit derivatives. Supplementary reading: Fabozzi Chapters 21, 22, 30. Sundaresan, Chapter 10. Monetary policy, inflation, economic activity and interest rates. Supplementary reading: Sundaresan, Chapters 3, 14; Federal Reserve Board, 2005, Monetary Policy and the Economy. Credit crisis. Supplementary reading: Brunnermeier, Markus, 2009, Deciphering the Liquidity and Credit Crunch 2007-2008, Journal of Economic Perspectives 23, 77-100.

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