Base Knowledge
Previous knowledge in the areas of Mathematics of Finance and Financial and Monetary Economics.
Teaching Methodologies
Classes are theoretical-practical in nature, initially favouring the lecture method, followed by the application of the concepts learnt through the resolution of a set of practical cases.
As this is a 2nd cycle course, it is important to carry out assignments, which take the form of discussing a scientific article.
The articles proposed to the students are the result, in each edition, of the observation of a set of criteria, namely: that they come from the same thematic area; that they have been published recently; and that they are relevant to the literature.
This methodology allows for the acquisition of new knowledge, but also contact with the latest research practices.
Learning Results
Goals:
In the context of this subject, one intends to promote the discussion of issues associated with the bond market, especially the essential characteristics of bonds, as well as the existing typologies, assessment measures and their potential as an instrument for hedging interest rate risk.
Skills:
At the end of the course, students must be able to:
– identify the main characteristics of the various types of bonds and get to know the different market segments;
– understand the fundamental concepts associated with the time structure of an economy’s interest rate;
– discuss the various profitability measures and bond valuation methodologies;
– consider the main measures for assessing interest rate risk and apply them when pursuing asset and liability immunisation strategies;
– recognise the main trends in the markets and in bond research.
Program
1. Organization and operating mode
Concept and characteristics of bonds
Types of bonds
Market segments
2. Time structure of interest rates
Spot rates
Forward rates
Discount factors
Estimating the term structure of interest rates: bootstrapping
Explanatory theories
3. Bond yield measures
Coupon rate
Current yield
Effective rate of return
Yield to maturity
Modified yield to maturity
Yield to call
Realized income rate
4. Bond valuation
Bond valuation methods
Floating rate bonds
Bonds with credit risk
Bonds with embedded options
Interest between coupons
Zero coupon bonds
Perpetuities
5. Interest rate risk measures: duration and convexity
Macaulay duration
Modified duration
Approximate modified duration
Effective duration
Key rate duration
Money duration
Analytical duration versus empirical duration
Duration of a portfolio
Convexity
Convexity of a portfolio
6. Immunization from interest rate risk
Single-period immunization
Multi-period immunization
Curricular Unit Teachers
Ana Paula do Canto Lopes Pires Santos QuelhasInternship(s)
NAO
Bibliography
Fundamental:
Fabozzi, F. J. & Fabozzi, F. A. (2021). Bond Markets, Analysis, and Stategies. The MIT Press, 10.ª edição.
Fabozzi, F. J., Mann, S. & Fabozzi, F. A. (2021). The Handbook of Fixed Income Securities. McGraw Hill, 9.ª edição.
Quelhas, A.P. (2022). Mercado de Obrigações: Características, Avaliação e Medidas de Risco. Coimbra: Editora d’Ideias.
Complementary:
Goncharenko, R., Ongena, S. & Rauf, A. (2021). The agency of CoCos: Why contingent convertible bonds are not for everyone. Journal of Financial Intermediation, 48, 100882 (https://doi.org/10.1016/j.jfi.2020.100882).
Quelhas, A. P. (2023). Sustentabilidade e Investimento – Uma visão crítica sobre o caso das green bonds. Boletim de Ciências Económicas, LXVI, 2593-2626.
Sinclair, S., McHugh, N. & Roy, M. J. (2021). Social innovation, financialisation and commodification: a critique of social impact bonds. Journal of Economic Policy Reform (https://doi.org/10.1080/17487870.2019.157141).
Note: Assessment works will be carried out based on a set of additional references.