Bond Markets

 Previous knowledge in the areas of Mathematics of Finance and Financial and Monetary  Economics.

Classes will use the expository method, and this exhibition will be accompanied by a wide range of practical cases.

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:

– Describe the main features of money and bond market instruments;

– Explain the fundamental concepts regarding the temporal structure of interest rates in an economy;

. Discuss the different methodologies for valuing the various types of bonds and the different yield measures;

  · Use the main interest rate risk assessment measures and asset and liability immunization strategies;

  · Debate some of the interest rate time structure models;

  · Identify the main derivative financial instruments to be used in the management of interest rate risk.

1. Money market instruments and bonds

1.1. Money market instruments a

1.2. Characteristics of bonds

1.3. Kinds of bonds

2. Time structure of interest rates

2.1. Spot interest rates

2.2. forward interest rates

2.3. Discount factors

2.4. Explanatory theories of the time structure of interest rates

3. Bond yield measures

3.1. Coupon rate

3.2. Current income rate

3.3. Effective rate of return

3.4. Actuarial yield rate or yield to maturity

3.5. Modified yield to maturity

3.6. Yield to call

3.7. Realized income rate

4. Bonds’ valuation

4.1. Bond valuation methods

4.1.1. Market interest rate

4.1.2. Spot rates and forward rates

4.1.3. Matrix pricing

4.1.4. Binomial interest rate trees

4.2. Valuation of floating rate bonds

4.3. Bonds with credit risk

4.4. Valuation of bonds with embedded options

4.5. Calculation of interest between coupons

4.6. Two particular cases of evaluation

5. Interest rate risk measures: duration and convexity

5.1. Macaulay duration

5.1.1. Macaulay duration as a measure of price-function sensitivity

5.1.2. Factors conditioning the duration of Macaulay

5.1.3. Fisher-Weil duration: a particular case?

5.2. Modified duration

5.3. Approximate modified duration

5.4. Effective duration

5.5. Key rate duration

5.6. Money duration

5.7. Analytical duration versus empirical duration

5.8. Duration of a bond portfolio

5.9. Convexity

5.10. Convexity of a bond portfolio

6. Interest rate risk immunization

6.1. Uniperiod immunization

6.2. Multiperiod immunization 6.3. Balance immunization

7. Methods of direct estimation of the time structure of interest rates

7.1. Bootstrapping

7.2. Nelson-Siegel

7.3. Svenson

7.4. cubic splines

8. Time structure measures of interest rates

8.1. Vasicek’s model

8.2. CIR model

8.3. Ho-Lee’s Model

8.4. Hull-White Model

8.5. Multifactor CIR model

8.6. stochastic duration

8.7. HJM models

9. Interest rate risk management derivatives

9.1. Interest rate forwards

9.2. Futures on short-term interest rates

9.4. Interest rate swaps

NAO

 Fundamental:

Fabozzi, F. J. & Fabozzi, F. A. (2021). Bond Markets, Analysis, ans Stategies. The MIT Press, 10th edition.

Fabozzi, F. J. & Fabozzi, F. A. (2022). Fixed Income Mathematics: Analytical and Statistical Techiques. McGrawHill, 5th edition.

Fabozzi, F. J., Mann, S.  & Fabozzi, F. A. (2021). The Handbook of Fixed Income Securities. McGraw Hill, 9.th edition.

 Quelhas, A.P. (2022). Mercado de Obrigações: Características, Avaliação e Medidas de Risco. Coimbra: Editora d’Ideias.

Complementary:

Baker, M., Bergstresser, D., Serafeim, G. & Wurgler, J. (2022). The Pricing and the Ownership of US Green Bonds. Annual Review of Financial Economics (https://www.annualreviews.org/doi/pdf/10.1146/annurev-financial-111620-014802)

Dan, A. & Tiron-Tudor, A. (2021). The Determinants of Green Bond Issuance in the European Union. Journal of Risk and Financial Management, 14, 446 (https://doi.org/10.3390/jrfm14090446)

Ferrer, R., Benítez, R. & Bolós, V. J. (2021). Interdependence between Green Financial Instruments and Major Conventional Assets: A Wavelet-Based Network Analysis. Mathematics, 9(8) (https://doi.org/10.3390/math9080900).

Gilchrist, D., Yu, J. & Zhong. R. (2021). The Limits of Green Finance: A Survey of Literature in the Context of Green Bonds and Green Loans. Sustainability, 13, 478 (https://doi.org/10.3390/su13020478).

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).

Naeem, M. A., Adekoya, O. B. & Oliyiede, J. A. (2021). Asymmetric spillovers between green bonds and commodities. Journal of Cleaner Production, 314, 128100

Park, J., Lee, H., Butler. J. S. & Denison, D. (2020): The effects of high-quality financial reporting on municipal bond ratings: evidence from US local governments. Local Government Studies, DOI: 10.1080/03003930.2020.1825385

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/10.1080/17487870.2019.1571415

Zhang, Z., Wang, Z. & Chen, X. (2021). Pricing Convertible Bond in Uncertain Financial Market. Journal of Uncertain Systems, 14(1) DOI: 10.1142/S1752890921500070.