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2013/2014  KAN-CM_SU8O  Bond Markets

English Title
Bond Markets

Course information
Language English
Exam ECTS 7.5 ECTS
Type Elective
Level Full Degree Master
Duration Summer
Course period Summer
Please check www.cbs.dk/summer for the course schedule.
Time Table Please see course schedule at e-Campus
Study board
Study Board for MSc in Economics and Business Administration
Course coordinator
  • Course instructor - Erik Theissen, University of Mannheim
    Patricia Plackett - Department of Operations Management (OM)
Main academic disciplines
  • Finance
Last updated on 24-07-2013
Learning objectives
After this course students should
  • know the institutional features of primary and secondary markets for bonds
  • be able to value standard coupon and zero bonds
  • be able to describe the various approaches to explain the term structure of interest rates
  • be familiar with the concepts for measuring and managing interest rate risk and credit risk
  • understand the basic features of valuation principles for non-standard bonds (such as callable or convertible bonds)
  • be able to describe different approaches to manage a bond portfolio
  • be able to describe how securitization works, describe the problems involved and how they relate to the 2007-2008 financial crisis
Course prerequisites
It is recommended that students are familiar with basic finance issues at the level of standard finance textbooks such as Brealey/Myers/Allen (Principles of Corporate Finance, 10th. edition, McGraw-Hill 2011), Ross/​Westerfiled/​Jaffee/​Jordan (Modern Financial Management, 8th edition, McGraw-Hill 2008), Berk/DeMarzo (Corporate Finance, Addison-Wesley 2008), or similar textbooks.
Prerequisites for registering for the exam
Compulsory assignments (assessed approved/not approved)
Mandatory Mid-term Assignment:
The mid-term assignment will be a short written assignment (2-3 pages).
Examination
4-hour written exam:
Examination form Written sit-in exam
Individual or group exam Individual
Assignment type Written assignment
Duration 4 hours
Grading scale 7-step scale
Examiner(s) One internal examiner
Exam period Summer Term
Aids allowed to bring to the exam Limited aids, see the list below and the exam plan/guidelines for further information:
  • Additional allowed aids
  • Allowed dictionaries
Make-up exam/re-exam
Same examination form as the ordinary exam
If the number of registered candidates for the make-up examination/re-take examination warrants that it may most appropriately be held as an oral examination, the programme office will inform the students that the make-up examination/re-take examination will be held as an oral examination instead.
Description of the exam procedure
Each student is allowed to bring one sheet of A4 or letter format paper (double-sided). Students can write (handwriting only!) on the sheet whatever they like. The sheet must be readable without aids (such as magnifying glasses). Students are not allowed to bring a pocket calculator (but can use Microsoft Excel and the standard Windows calculator). Dictionaries allowed.
Course content and structure

Many courses on investments have their focus on equity markets and cover bond markets only briefly, if at all. However, by sheer volume bond markets are much larger than equity markets, and the 2007-2008 financial crisis had its origin in the (structured) bond market.
 
This course is devoted entirely to bond markets, bond portfolio management, and the measurement and management of the risks involved. It introduces the institutional features of primary and secondary bond markets, discusses the valuation of both standard and non-standard bonds, and introduces and explains the term structure of interest rates. It further addresses issues in risk measurement and management (both interest and credit risk) and discusses issues in bond portfolio management. The last chapter discusses asset-backed securities and relates this discussion to the 2007-2008 financial crisis.

The course's development of personal competences:
The course helps students to develop their presentation skills. They will have to solve problems and present the solutions in class.
 
Teaching methods
The course will consist of lectures (about 60-70%) and exercise sessions in which we will discuss questions related to the contents of the course (30-40%). Students will have to present solutions to problems in class.

Preliminary Assignment: To help students get maximum value from ISUP courses, instructors provide a reading or a small number of readings to be read before the start of classes with a related task or tasks in the first two classes in order to 'jump-start' the learning process. The preliminary assignment will be a set of questions. I will provide a list of readings. Based on those readings, students will have to answer a set of questions and present the solutions in class. These solutions should explain the concepts and tools used to solve the problem in depth.
Expected literature

1        Fixed Income Markets

  • Bodie, Z., A. Kane and A. Marcus (2009): Investments, 8th edition, McGraw Hill, section 14.1.
  • Fabozzi, F. (2010): Bond Markets, Analysis and Strategies, 7th edition, Pearson, chapter 1.
  • Sundaresan, S. (2009): Fixed Income Markets and Their Derivatives, 3rd edition, Academic Press, chapters 1, 4 and 6.1-6.3.
  • Veronesi, P. (2010): Fixed Income Securities, Wiley, chapter 1.

2        Pricing Bonds

  • Bodie, Z., A. Kane and A. Marcus (2009): Investments, 8th edition, McGraw Hill, sections 14.2.-14.4. 
  • Fabozzi, F. (2010): Bond Markets, Analysis and Strategies, 7th edition, Pearson, chapters 2 and 3. (Be careful on p. 22-25)
  • Sundaresan, S. (2009): Fixed Income Markets and Their Derivatives, 3rd edition, Academic Press, sections 2.1 and 2.2
  • Veronesi, P. (2010): Fixed Interest Securities, Wiley, chapter 2 (including the appendix).

3        The Term Structure

  • Bodie, Z., A. Kane and A. Marcus (2009): Investments, 8th edition, McGraw Hill, sections 15.3.-15.6.
  • Elton, E., M. Gruber, St. Brown and W. Goetzmann (2007): Modern Portfolio Theory and Investment Analysis, 7th edition. Wiley, Chapter 21.
  • Fabozzi, F. (2010): Bond Markets, Analysis and Strategies, 7th edition, Pearson, chapter 5.
  • Sundaresan, S. (2009): Fixed Income Markets and Their Derivatives, 3rd edition, Academic Press, chapter 8.

4        Interest Rate Risk

  • Bodie, Z., A. Kane and A. Marcus (2009): Investments, 8th edition, McGraw Hill, sections 16.1.-16.3.
  • Elton, E., M. Gruber, St. Brown and W. Goetzmann (2007): Modern Portfolio Theory and Investment Analysis, 7th edition. Wiley, Chapter 22, p. 540-552 and appendices A and D.
  • Fabozzi, F. (2010): Bond Markets, Analysis and Strategies, 7th edition, Pearson, chapters 4 and 25.

5        Callable Bonds, Warrants, and Convertible Bonds

  • Ross, S., R. Westerfield, J. Jaffe and B. Jordan (2008): Modern Financial Management, 8th edition, McGraw Hill, chapter 20, p. 585-589 and chapter 24.
  • Bodie, Z., A. Kane and A. Marcus (2009): Investments, 8th edition, McGraw Hill, section 20.5.
  • Sundaresan, S. (2009): Fixed Income Markets and Their Derivatives, 3rd edition, Academic Press, section 7.5.

6        Default Risk

  • Crouhy, M., D. Galai und R. Mark (2001b): Risk Management. McGraw Hill, chapters 7 and 8.
  • Reilly, F., D. Wright and J. Gentry (2009): Historic changes in the High Yield Bond Market. Journal of Applied Corporate Finance 21, 65-79.

7        Issues in Bond Portfolio Management

  • Fabozzi, F. (2010): Bond Markets, Analysis and Strategies, 7th edition, Pearson, p. 513-516 in chapter 23; p. 584-586, 590-591 in chapter 25.
  • Elton, E., M. Gruber, St. Brown and W. Goetzmann (2007): Modern Portfolio Theory and Investment Analysis, 7th edition. Wiley, p. 552-555 in chapter 22.

8        Securitization

  • Jobst, A. (2007): A Primer on Structured Finance. IMF Working Paper.
  • Sundaresan, S. (2009): Fixed Income Markets and Their Derivatives, 3rd edition, Academic Press, chapter 12.

(Please note: One chapter does not strictly correspond to one class)

Last updated on 24-07-2013