25728 Fixed Income Analysis

Warning: The information on this page is indicative. The subject outline for a particular session, location and mode of offering is the authoritative source of all information about the subject for that offering. Required texts, recommended texts and references in particular are likely to change. Students will be provided with a subject outline once they enrol in the subject.

Subject handbook information prior to 2025 is available in the Archives.

UTS: Business: Finance
Credit points: 6 cp

Subject level:

Postgraduate

Result type: Grade and marks

Requisite(s): 25721 Investment Management
These requisites may not apply to students in certain courses.
There are course requisites for this subject. See access conditions.

Description

The market for fixed income financial instruments is the financial sector's largest worldwide. This specialised subject focuses on the conceptual and theoretical aspects of interest rates and interest rate risk management in local and international fixed income markets.

The subject includes material on the term structure of interest rate, including spot, forward and swap interest rate structures. The pricing of fixed and floating rate bond pricing is addressed. The role of bond portfolio strategies in generating speculative profits and in the reduction or portfolio risk is examined in depth. Students are provided with an insight into financial engineering in their construction of fairly priced structured notes.

The subject focuses students on the practical problems of fixed income portfolio management through a series of hands-on, computer-based simulation exercises. This is a quantitative-based subject where applied problems and calculation are emphasised.

Subject learning objectives (SLOs)

Upon successful completion of this subject students should be able to:

1.	Explain the characteristics of the term structure of interest rates and be able to transform a coupon bond based term structures into their zero-coupon, forward and par rate equivalents
2.	Evaluate the characteristics of fixed income portfolios such as duration, basis point value and convexity
3.	Analyse the risks and profitable opportunities of fixed interest portfolios
4.	Hedge the risk associated fixed income positions
5.	Construct and price structured notes from a combination of fixed income bonds and interest rate swaps

Contribution to the development of graduate attributes

This is a specialised subject focusing on many aspects of the valuation and risk assessment of fixed income securities and portfolios. The subject is designed to ensure that students are provided with a detailed analysis of the techniques used by analysts and fund managers in the construction of yield curves, analysis and valuation of fixed income securities and the construction and management of bond portfolios and structured financial instruments.

Successful completion of this subject makes a contribution to students acquiring all Graduate Attributes. However, the subject makes a particular and significant contribution to the attributes of intellectual rigour and innovative problem solving and business professional and technical competence via the (1) absorption of the subject material, (2) the class discussion, (3) the completion of the applied Excel exercises and problems posed and solved during the bond portfolio management simulations.

Teaching and learning strategies

The course will be taught using a combination of face-to-face lectures/seminars, class discussion, in-class applied exercises and on-line learning. 25728 FIA classes are devoted to more than delivering the subject material. Class discussions are employed to promote and reinforce understanding. Applied Excel exercises are undertaken by students, during class, - either individually or in groups, to apply theoretical concepts to specific financial market and investment situations. A highlight of the course is the undertaking of bond portfolio management simulations where students face the same issues problems that financial sector traders and managers face in the day to day performance of their professional occupation.

The lecture program is designed to encourage interaction between the lecturer and students. To facilitate this, students are required to undertake pre-class work, details of which are in the weekly program.

The subject is technical and quantitative and should only be attempted by students with a solid mathematical grounding and with high-level computer spreadsheet expertise.

Online resources will be used cover the basic financial notions underpinning the different portfolio strategies and provide examples of existing financial products and strategies. The https://learning management system is central to the provision of digital resources for this subject. For each class the following resources reside on the subjects Subject Documents section:

Lecture background notes
Lecture PowerPoint lecture notes
Problems and Exercises documents and
Excel Exercises workbook

Content (topics)

The financial environment and influences on interest rates
The term structure of interest rates; zero-coupon spot rates forward rates and swap rates.
Pricing and hedging fixed and floating rate bonds
Interest rate derivatives, mortgaged backed securities, option embedded instruments
Risk management characteristics of fixed income portfolios.
Bond portfolio management simulations.
Interest rate futures and structured fixed income instruments

Assessment

Assessment task 1: Quizzes (Individual)*

Objective(s):	This addresses subject learning objective(s): 1, 2, 3 and 4
Weight:	20%
Criteria:	Demonstrated understanding of the nature and purpose of short-term financial instruments and longer-term coupon-paying bonds Pricing of fixed-income securities Quality and correctness of responses to numerical and short-answer questions *Note: Late submission of the assessment task will not be marked and awarded a mark of zero. Students who are unable to attend the quiz will have the weighting of this assessment component added to the final examination conditional on the students submitting, receiving approval and complying with the requirements of special consideration in accordance with the UTS rules. If the composite mark for the final exam totals more than 50 percent and the student is in the final subject of their degree, the UTS rules on borderline result (range of 45-49) shall apply whereby students will be allowed to undertake a supplementary final examination. Where a student completes the supplementary examination, the maximum mark awarded for the subject will be 50 Pass.

Objective(s):

This addresses subject learning objective(s):

1, 2, 3 and 4

Weight:

20%

Criteria:

Demonstrated understanding of the nature and purpose of short-term financial instruments and longer-term coupon-paying bonds
Pricing of fixed-income securities
Quality and correctness of responses to numerical and short-answer questions

*Note: Late submission of the assessment task will not be marked and awarded a mark of zero.

Students who are unable to attend the quiz will have the weighting of this assessment component added to the final examination conditional on the students submitting, receiving approval and complying with the requirements of special consideration in accordance with the UTS rules. If the composite mark for the final exam totals more than 50 percent and the student is in the final subject of their degree, the UTS rules on borderline result (range of 45-49) shall apply whereby students will be allowed to undertake a supplementary final examination. Where a student completes the supplementary examination, the maximum mark awarded for the subject will be 50 Pass.

Assessment task 2: Bond Portfolio Management Simulations (Group)

Objective(s):	This addresses subject learning objective(s): 1, 2 and 3
Weight:	20%
Criteria:	Explanation of the economic forces influencing interest rates (in general) and the Treasury Bond yields (in particular) Portfolio performance—based on risk and return—over several simulation rounds

Assessment task 3: Final Exam (Individual)

Objective(s):	This addresses subject learning objective(s): 1, 2, 3, 4 and 5
Weight:	60%
Length:	The exam has a two-hour duration and will conducted as an online Canvas quiz assessment.
Criteria:	Understanding of bond characteristics, such as price, duration, convexity, and basis point value, as well as their dollar equivalents Understanding of how bond characteristics guide the management of bond portfolios Explanation and application of the term structure of interest rates Ability to transform a coupon bond-based term structure into its zero-coupon-, forward-, and par rate equivalents Analysis of risks and opportunities for fixed-income portfolios Construction and pricing of structured notes, using a combination of fixed-income bonds and interest-rate swaps Accuracy of answers to numerical questions Quality of written responses to short-answer- and essay questions

Minimum requirements

Students must achieve at least 50% of the subject’s total marks.

Required texts

The online Text Pricing Trading and Managing Bonds, B.F.Hunt, 2021, is posted on the subject's Subject Resources module and is available for downloading

References

Fabozzi, F. J., 2012, Bond Markets, Analysis and Strategies, 8th edition, Prentice-Hall,

Hunt, B., and C. Terry, 2018, Financial Institutions and Markets, 8th edition, Cengage.

Other resources

The lecture notes will be available on the Subject's Canvas site. Students will be provided with problem sets to be discussed in class. These will also be available from Canvas.