MFIN 5730 Fixed Income Analysis
In recent years, there has been an explosion of activity in the fixed income markets as corporations and governments continue to issue record amounts of debt. The size of the global fixed income market has reached nearly $100 trillion, far exceeding the $55 trillion capitalization of the global equity market. In addition, the market for fixed income derivatives has exploded over the past thirty years in response to a series of crises that have increased uncertainty over the behavior of interest rates. The fixed income markets consist of an extremely wide array of products, ranging from simple coupon-bearing bonds to structured products such as asset-backed securities. These products provide investors with the advantage of flexibility due to the large number of choices that are available. One of the major disadvantages of these products is that they expose investors to the risk of fluctuations in interest rates and other variables. Due to the complex behavior of interest rates, valuation and management of fixed income products can be extremely challenging. In addition, many fixed income products contain embedded optionality, which further complicates the pricing and management of these securities. In recent years, spectacular losses have occurred at several financial institutions due to the misuse of fixed income products and their derivatives. The complexity of fixed-income products and fixed-income derivatives requires market participants to acquire a deep understanding of how their cash flows are structured, how their values are affected by interest rates and an understanding of the properties of interest rates. Market participants also need to understand how interest rate risk is measured, and what types of strategies may be used to hedge interest rate risk. Portfolio managers need insight into the different types of strategies that may be employed with fixed-income portfolios.