Fixed-Income Securities

Module code: EC7098

Suppose a credit-worthy friend asks for a loan of £100. What terms should you ask for? It is highly likely that you would expect to receive more than £100 in repayment to compensate for the loss of control over your wealth during the loan period. Thus lenders and borrowers are able to calculate the value of a future payment in terms of today’s (present) value. From this simple building block, complicated fixed-income products involving multiple payment dates can be evaluated because they are just combinations of simple loan agreements.

The concept that future payments have a single price provides a useful pricing tool for investment managers who want to use bond securities for investing, market making or speculating. Yet despite their apparent simplicity, there are significant risks to holding fixed-income portfolios, in particular changes in interest rates.  Fortunately, the loss or gain in the value of a portfolio of bonds induced by interest rates changes can be approximated by the portfolio’s duration and convexity. In this module we will explore how investment managers use asset liability management, interest risk management and immunisation to manage interest rate risk of bond portfolios.

Topics covered

• Features of fixed-income securities, main fixed-income securities, and fixed-income markets
• Bond risks
• Fixed-income valuation and analysis
• Term structure of interest rates
• Interest rate risk