Equity and Fixed Income

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Main objective of the course is to discuss problems of equity/corporate value and fixed income securities from practical perspective: construction, valuation and application in the field of financial markets. Course is comprised of two main building-blocks (preceded by one introductory lecture):

1) corporate valuation,

2) overview of fixed income securities, its valuation and application.

The course is intended for students with basic knowledge in finance, eager to learn some new concepts regarding fixed income markets. Assessment will be based upon written examination.

LECTURE 1. Revision of basic concepts:

- time value of money,

- incorporation of risk into the model.

PART I Corporate Valuation

LECTURE 2. Introduction to Company Valuation

- purposes of company valuation,

- basic notions and assumptions.

LECTURE 3. Discounted Cash Flows Method in detail

LECTURE 4. Weighted Average Cost of Capital

LECTURE 5. DCF in practice

PART II Fixed Income Securities

LECTURE 6. Overview of Fixed Income Securities and Bond Valuation.

- basic fixed income securities: bonds and their features,

- fixed income derivatives: futures, options, swaps, swaptions

- bond valuation methods.

LECTURE 7. Theory of Interest Rates

- yield curve (possible shapes, theories of yield curve)

- kinds of interest rates: spot rates, forward rates, simple and compunded interest (incl. logarithmic rates), short rates

LECTURE 8. Risk associated with investing in bonds and its measurement

- kinds of risks (incl. interest rate risk, reinvestment risk, liquidity risk, credit risk)

- duration, convexity and other methods in quantifying interest rate risk.

LECTURE 9. Forward Rate Agreements

LECTURE 10. Interest Rate Swaps

LECTURE 11. Modeling Option-like Fixed Income Securities

- Binomial Trees

- Black's Model

LECTURE 12-13. Caplets, Floorlets/Caps, Floors

LECTURE 14. Swaptions

LECTURE 15. Bonds with Embedded Derivatives

Required

F. Fabozzi, S. Mann (2005) - Handbook of Fixed Income Securities, McGraw-Hill

J. Hull (2006) – Options, Futures and Other Derivatives

T. Koller, M. Goedhart, D. Wessels (2005) - Valuation - Measuring and Managing the Value of Companies, Wiley

Additional

S. Nawalkha, G. Soto, N. Beliaeva (2005) - Interest Rate Risk Modelling; Wiley

B. Tuckman (2002) - Fixed Income Securities; Wiley

R. Jarrow, S. Turnbull (1996) - Derivative Securities, South-Western College Publishing

A. Damodaran (2006) - Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, Wiley

Students with given credit for this course can demonstrate knowledge at intermediate level concerning comapny valuation and fixed income securities and have acquired practical skills related to the subject of pricing and application of securities in question. Program of the course encompasses concepts that are required for (and in some cases goes beyond) CFA examination (related to the Fixed Income Analysis), nevertheless should not be treated as a preparatory course for CFA examination.

KW01, KW02, KU01, KU02

Credit is based solely on written examination at the end of the course.