Fixed Income Securities

ABOUT THIS MODULE

In this Module, we are going to focus on fixed interest securities or bonds. On the supply, issue or sell-side of these instruments we find Governments (so-called Treasuries or gilts) and corporates (also referred to as credit bonds). On the buy-side, we find banks and non-banking financial institutions (NBFI’s), where fund managers, pension funds and insurers represent the latter. Banks hold bonds for trading or prudential purposes (or monetary policy reasons if it is a central bank); insurers to match their liabilities; and fund managers to offer investment and retirement solutions. The holdings of bonds by fund managers will range from 100% (in bond only funds) to 40-70% (in balanced funds) to NIL (in equity only funds). Lastly, we have the intermediaries that facilitate trading of bonds – they include banks, exchanges and brokers.

Instructors: Dr Mike Lamont (course Chair) and Prof Johann de Villiers

Office hours: see available times on office doors (Rooms 313 & 310 in CGW-Schumann building) but you are welcome to make an appointment via email.

Phones: 021 808 9270 (Lamont) and 021 808 9540 (De Villiers)

E-mails: [email protected] and [email protected]

Website: see SUN Learn for all communication and information

Course Objectives: Students will learn the characteristics and valuation of various types of fixed income securities, the types of risks in fixed income securities such as interest rate risk, credit risk and reinvestment risk, some derivative structures and the role of credit. In addition, students will learn the application of Bloomberg. The knowledge you acquire should cover the learning outcomes of the CFA Examinations level 1 as specified by the CFA Institute (www.cfainstitute.org).

Textbooks: Required: Barbara Petitt, Jerald Pinto & Wendy Pirie. Fixed-Income Analysis (3rd edition). CFA Institute. 2015. (We refer to it as PPP) Other sources: . Moorad Choudhry. An introduction to bond markets. 4th edition. Wiley. 2010 . Annette Thau. The bond book. 3rd edition. McGraw Hill. 2011 . Frank Fabozzi. The handbook of fixed income securities. 8th edition. McGraw Hill. 2012 . Frank Fabozzi. Fixed Income Analysis. 2nd edition. Wiley. 2007 . Bruce Tuckman & Angel Serrat. Fixed Income Securities – tools for today’s markets. 3rd edition. Wiley. 2012 . Frank Fabozzi. Fixed Income Mathematics. 4th edition. McGraw Hill. 2006 . Zvi Bodie, Alex Kane & Alan Marcus. Essentials of Investments. 9th edition. McGraw Hill. 2013 (Chapters 2 and 10) . Zvi Bodie, Alex Kane & Alan Marcus. Investments. 10th edition. McGraw Hill. 2014 (Chapters 14 & 15)

Journals: You are welcome to consult the following journals on bond market related articles: . Journal of Fixed Income . Financial Analyst Journal . International Journal of Bonds and Derivatives

Websites: The following websites are relevant to this course. . SUN Learn: consult for lecture notes, slides, articles and instructions. . Also useful to consult selected websites or sources. Here are some suggestions: o http://www.bloomberg.com/markets/rates-bonds/ o https://www.jse.co.za/trade/debt-market o http://www.investinginbondseurope.org o http://bondtutor.com o http://www.icmagroup.org/ o https://www.pimco.com

Tools: The University has a number of Bloomberg terminals available in the Library. We expect that groups and individuals will utilise this tool for self-learning and assignments. All registered students will be loaded for Bloomberg usage, but each student has to set up his/her own login details. A starter guide appears on SUN Learn.

Format: Class will be a mixture of lecture, discussions, and presentations.

Required Calculator: You are welcome to use any non-programmable financial calculator.

Tests & Exams: we have scheduled the tests and exams as follows: . Formal Class test: 24 February and 19 April 2017 . Semester test: 9 March 2017 . Sick test: there will be ONE sick test for both the class & semester test – this test will cover all the work prescribed for the original tests and will be written on 6 May 2017 . Final Exam: Friday 19 May 2017 [2nd exam is Saturday 10 June 2017]

Team & Individual Assignment: Students must complete a practical assignment as part of the assessment outcomes. The assignment consists of two parts: part 1 has to be done in groups (maximum 5 and minimum 3 – no exceptions) and part 2 individually. For part 1 there will be a peer evaluation at the end of the project (team component 60% by as evaluated by lecturers; individual component 40% by group members). If the average grade of a team member based on the peer evaluation is below 50%, the team member will NOT receive the same grade of the team component.

Part1: Use Bloomberg to prepare a short presentation booklet (maximum 4 pages) that contains information and brief explanatory notes on the following: a. Any South African Government Bond.

b. A 3-month repo on a R186 bond. (Show the result for a local investor and a foreign investor where the $/ZAR exchange rates are 13.50 at the start and 14.00 at the end. Use a relevant repo rate). c. A comparison of returns over 2016 of one financial sector high yield bond from the S&P 500 high yield corporate bond index with the index and the S&P 500 equity index. d. Any recent syndicated loan by a South African bank.

Part 2: Bloomberg Market Concepts (BMC) is an 8 hour self-paced e-learning course that consists of four modules (2 hours each) – Economics, Currencies, Fixed Income and Equities. Complete the full market concepts test. The certificate of completion and the outcome will represent your mark for this assignment. The same mark is used for the IM 314 assignment. A short Pdf document on BMC is available on SUN Learn. Both assignments have to be submitted on 28 April 2017 @ 12h00.

Grading policy & assessment for the module: . Your performance mark (PM) is the summation of the class mark (CM) and the exam mark (EM) which, respectively, weigh 40% and 60% . Your class mark consists of a semester test (50% of CM & 20% of PM); class tests (30% of CM & 12% of PM) (some may be informal or based on class presence) and assignments (20% of CM & 8% of PM) . Your examination mark is 60% of the PM . In the case of a successful re-write, the PM defaults to 50%.

Weekly contact sessions: this year the course has an alternating frequency allowing students the choice to attend either the English or the Afrikaans lectures. The Afrikaans sessions are on a Monday and a Wednesday. (The only exception is that on Friday 24 March 2017 we follow a Monday roster, i.e. the class is in Afrikaans). The English contact sessions are as follows:

Day Period Hall

Thursday 6 (14:00 – 14:50) Schumann 204

Friday 1 (08:00 – 08:50) Schumann 204

Course Overview and Dates: the tentative schedule for the semester is as follows and may change at the instructors’ discretion. The course unfolds in two levels with 9 broad topics.

Subjects Dates Reading Lecturer

Introduction 02-Feb Slides JdV Securities & procedures 03-Feb PPP 1 & 2 JdV Securities & procedures 09-Feb PPP 1 & 2 JdV Pricing & yield measures 10-Feb PPP 3 JdV Pricing & yield measures 16-Feb ppp 3 JdV Pricing & yield measures 17-Feb PPP 3 JdV Risks & Returns 23-Feb ppp 4 JdV Class test 1 24-Feb Risks & Returns 02-Mar ppp 4 JdV Risks & Returns 03-Mar ppp 4 JdV Risks & Returns 09-Mar ppp 4 JdV Credit 10-Mar PPP 5 & 6 JdV Semester test 09-Mar Credit 16-Mar ppp 5 & 6 JdV Credit 17-Mar PPP 5 & 6 JdV Holiday 20-Mar Holiday 21-Mar Term structure 23-Mar PPP 10 JdV Term structure 30-Mar PPP 10 JdV Embedded options 31-Mar PPP 8 & 9 MPL Embedded options 06-Apr PPP 8 & 9 MPL Embedded options 07-Apr PPP 8 & 9 MPL Recess 10-17 Apr Class test 2 19-Apr Repo's & FRA's 20-Apr SUN Learn MPL Swaps 28-Apr SUN Learn MPL Holiday Hand in assignments 28-Apr SUN Learn Swaps 28-Apr SUN Learn MPL

Holiday Derivatives 04-May SUN Learn MPL Sick Test for all previous tests 06-May Derivatives 05-May SUN Learn MPL Derivatives 11-May SUN Learn MPL

Examination 1 19-May Examination 2 10-Jun

Participation: Finance professionals have strong work ethics. For example, they do not arrive late for appointments with clients or are not absent from meetings. We expect the same from our students. If you are sick, have an internship interview, or experience a family emergency, please provide us with evidence. This also applies tests and assignments.

Language: In terms of the Language Implementation Plan 2017 of the Faculty of Economic and Management Sciences, this module will be offered with separate lectures in Afrikaans and English. The Language Policy of the University requires the following module to be offered in this way:

7.1.3 For undergraduate modules where it is reasonably practicable and pedagogically sound to have more than one class group:

7.1.3.1 There are separate lectures in Afrikaans and English.

7.1.3.2 Learning opportunities, such as group work, assignments, tutorials and practical’s involving students from both language groups are utilised to promote integration within programmes.

7.1.3.3 Students are supported in Afrikaans and English during a combination of appropriate, facilitated learning opportunities (e.g. consultations during office hours or scheduled tutorials and practical’s).

“Bond market analysts will tell you that, unlike equities, the bond market is a proper market. A greater fall in a company’s bond price relative to other debt of the same sector, is a good indicator of the falling positive perception of the company’s overall health and financial well-being” Moorad Choudry in The global investor book of investing rules, 2001, p.71)

“The yield curve is thought to be a better predictor of the economy than the stock market and can therefore give you an edge if you follow it”. Anthony Crescenzi in The global investor book of investing rules, 2001, p.89)