COURSE NUMBER: MBA236I.1
This course
is dual-listed with the Evening-Weekend MBA Program
COURSE TITLE: Fixed
Income
UNITS OF CREDIT: 2.0
INSTRUCTOR:
[Satish Swamy]
E-MAIL ADDRESS: Satish.swamy@haas.berkeley.edu
PREREQUISITE: MBA203
– Core Finance
CLASS FORMAT: Lectures,
exercises, case study
and fixed income project
REQUIRED READINGS:
Textbook [and course reader]
BASIS FOR FINAL GRADE:
[Project, Midterm, final exams, and class participation.]
ABSTRACT OF COURSE'S CONTENT AND OBJECTIVES: Global Fixed-income markets are bigger in
size than stock markets. They represent a vitally important asset class and is
more often a leading indicator to analyze market risk. Institutional investors
have come a full circle from higher to lower and back to higher interest
rates. After a significant shift into
equity in the 80s and 90s by endowments, pension funds and insurance companies,
the tide shifted to bonds for the past 25 years. But bonds are risky. Bond
vigilantes in the US are predicting the onset of long-term rising rates as
fears of both inflation and unwinding of Federal Reserve balance sheet are
creeping up. The goal of this elective
is to cover the dynamic role of fixed income in large institutions and more
importantly analyze sources of risk and return.
While
the course is firmly grounded in a quantitative and analytical approach, as a
practitioner, I will endeavor to place our subject matter in the relevant real world context. Each lecture will begin with
a discussion of current market/economic conditions and how they relate to the
topic at hand. For example, the discussion on subprime mortgage crisis and the
role of leverage leading up to the financial crisis will be covered in great
detail. Relevant articles appearing in the Financial Times, Wall Street Journal
and NY Times will be discussed and market implications assessed. Guest speakers will include the CIOs of
Fixed Income for Blackrock and Goldman
Sachs Asset Management, Treasurers of leading tech companies in the Bay Area
and other practitioners in the fixed income markets.
The goal of this course is to
provide a solid understanding of the five major debt markets (Corporate;
Government and Agency; Municipal; Mortgage backed, asset backed, and
collateralized debt obligation; Funding) and of their recent derivative
appendices (swaps, CDS). The course will describe the major players in the
market, key institutions, broad empirical regularities, and analytical tools
used for pricing and risk management.
The course will have analytical
as well as institutional sections as both are needed to describe the
appropriate framework and analyze the corresponding pricing and risk management
tools and related issues. The course covers many topics organized around a theme.
For some lectures, class notes will be used in addition to or in lieu of
references.
Outline of Key Topics:
- Overview of Debt Securities:
What are debt securities? What are their sources of risk and return? Historical
performance of fixed income securities.
- Major players and their functions: United States Treasury, Federal Reserve
Banks, Primary Dealers, Inter-Dealer Brokers (IDB), Rating agencies, Sell-side
and Buy-side institutions.
- Bond mathematics: a) price and yield conventions, b) PVBP, Duration
(modified, effective and key-rate), convexity, and negative convexity. Trading
applications: spread trades, bullet vs barbell positions.
- Term Structure Theory: Spot rates, forward rates, par yields, modeling
interest rates and pricing bonds.
- Structural models of default: Modeling credit risk, credit spreads and their
behavior, Distance to default, forecasting rating changes, high-yield and
investment-grade debt markets
- Government, Agency and Corporate markets
- Municipal markets
- MBS: Structure of MBS markets, prepayments, Option Adjusted Spreads,
Pass-through securities, REMICs, risk measures
- Asset-backed markets
- Derivatives: Treasury futures, Interest Rate Swaps, Options on Swaps and
Single-name credit default swaps
- Clearinghouses vs exchanges vs OTC markets
Fixed Income Portfolio Management Group Project: A real
time fixed income project to analyze risk and return in the current macro
environment that incorporates central bank monetary policy, yield curve
dynamics, supply and demand for different types of fixed income securities, and
the role of bonds in a constant or higher yield environment.
Required texts:
The Handbook of Fixed Income Securities, 8th
edition by Frank Fabozzi
Attendance:
Attendance is mandatory and
please do not arrive late. Class
participation is an important of the learning process and the grade.
BASIS FOR FINAL GRADE: Your overall course grade will
be based on: project, mid-term, finals and class participation.
Project: 25%
Class participation: 15%
Mid-term: 30%
Finals: 30%
CAREER FIELD: This course is relevant to anyone
interested in pursuing a career in investment management.
BIOGRAPHICAL SKETCH:
Satish Swamy is Managing Director in the Office of the Chief Investment
Officer, Regents of the University of California for the past 21 years and has
experience managing fixed income portfolios for over 25+ years. He has experience in active management of $40
billion of fixed income assets in pension, endowment, working capital and
defined contribution portfolios. Assets under management range from money
market securities, Global bonds, FX, U.S. Treasuries, MBS, investment-grade
corporates to high yield and emerging market bonds He earned his MBA in Finance from the
University of Southern California, MSEE from the University of Houston and BS
in Engineering from Bangalore, India. He
is also a CFA charterholder.