Bond Markets

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.

– 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.

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

Assessment will be carried out using one of the following methods:

a) A final exam, on the dates laid down in the ISCAC Exam Calendar, with students obtaining a mark of 10 (ten) or more being approved.

b) Mixed assessment, consisting of a final exam and a written group assignment presented in class, each weighted at 50 per cent (only the final grade will be available).

The work referred to in b): must take the form of a discussion of a relevant article in the financial literature, in accordance with the methodology to be indicated in the 1st lesson. They must be carried out in groups, preferably with 2 members (all members of the group must take part in the presentation and discussion); they must be presented and discussed in the last scheduled class; they must be reduced to written form, with an indicative number of 10 pages, and sent to the teacher's email address by the date of the exam; the articles on which the work will be based are indicated in an autonomous document and will be made available in the first class; students may choose other articles, provided the teacher agrees.

Students who opt for the assessment method proposed in b) must obtain a minimum mark of 8 (eight) in the written exam. All students are obliged to take the exam in full.

As it happens in a), students who opt for b) will pass if they obtain a mark of 10 (ten) or more.

The written exam will cover all the material taught and will last two hours.

There will be no oral exams at any of the scheduled exam times.

The marks awarded for the work will be valid for the normal examination period as well as for the appeal and special examination periods, and it will not be permitted to carry out work exclusively for the appeal and special examination periods.