INTERNATIONAL FIXED INCOME

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INTERNATIONAL FIXED INCOME

• Professor Richardson
• Spring Semester, 2000

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Readings

• Syllabus
• Conventions in Major Government Bond Markets
• Interest Rate Quotes and Conventions, Gibbons,
  1994.
• Interest Rate Quotes and Conventions Using a
  Calculator

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Outline

• Description
• Materials
• Requirements
• Topics
• Perspective

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Description

• This course describes the important international
  fixed income securities and markets, with the
  goals of
• developing tools for valuing these securities and
  managing their interest rate risk,
• familiarizing students with the important fixed
  income markets and terminology, and
• building a general understanding of fixed income
  in an international context.

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Course Difficulty
The study of fixed-income markets is quantitative
in nature. Students should feel comfortable with
mathematical and statistical concepts. The
course material is very analytical, ant the
course itself stresses the underlying theory of
fixed income analysis. It is made all the more
difficult within the context of international
markets. Please keep this in mind in deciding
whether to take the course. Students will
struggle without knowledge of a spreadsheet
package (like excel).
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Who Should Take This Course?

• This course DOES overlap with fixed income
  (B40.3333) and international (B40.3388), so the
  course is suitable for either
• Students who want a strong background in
  international fixed income, or
• Students who want some background in fixed income
  and international, but dont want to take two
  courses.

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Course Materials

• Collection of presentation slides handed out in
  class, also available on my webpage
  www.stern.nyu.edu/mrichar0/teaching.html
• Class handouts of required readings periodically
  throughout the semester.
• There is NO good textbook for this class

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Course Requirements

• Exams
• Midterm (40) in class, March 1
• Final (60) May 8 (830-1030am)
• Problem Sets
• are long and difficult, require a knowledge of
  Excel, I encourage students to work together
• check /0/-, NC counts in borderline cases, 25
  of which I expect the class will find themselves

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Topics

• Introduction (1)
• Fixed Income Overview (6)
• International Basics (4)
• Midterm
• Empirical Factoids About Intl. Fixed Income (2)

• Valuation and Risks of Global Fixed Income (3)
• Emerging Market Debt (2)
• Financial Crises and the Intl. Bond Mkt (3)
• Intl. Fixed Income Derivatives (4)
• Course Review (1)

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Important Topics We Dont Cover

• Corporate bond market
• Central bank intervention
• Macroeconomy (e.g., balance of trade, monetary
  policy,)
• Taxation
• Methods for pricing and implementing fixed income
  derivative models

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Perspective
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What is a Fixed Income Instrument?

• Historically, the term fixed income was used to
  refer to securities that promise to pay fixed
  cash flows over their lives
• Now, we generally view any security whose value
  depends primarily on interest rates as a fixed
  income instrument

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A Diverse Line-Up of Products

• Government and corporate bonds (callable bonds)
• Index-linked bonds
• Mortgage-backed securities (CMOs)
• Floaters, inverse floaters (caps, collars, and
  floors)
• Repurchase agreements
• Forward and futures contracts
• Options
• Swaps

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Where Does International Come In to Play?

• With the globalization of financial markets, its
  important to understand fixed income valuation
  and risk in an international context.
• This means understanding the role of exchange
  rates, and how that affects the cross-relation of
  term structures and asset allocation.
• This means understanding sovereign risk and the
  effect of financial crises.

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Share of Various Currencies in Transactions (1998)
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The World Bond Market (1998)G7 Countries and
Other (excluding emerging markets)
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Bond Markets

• Domestic bond markets
• Market conventions differ across markets (see
  handout).
• International bonds
• Foreign bonds (bonds issued in a domestic market
  by non-domiciled issuers, e.g., Yankee bonds)
• Eurobonds (bonds issued offshore, outside of most
  national security regulations)
• Emerging market bonds
• Domestic bond market (200 bn)
• Eurobonds (100bn)
• Brady bonds (100 bn) - converted non-performing
  loans into denominated debt, traded on
  international bond market

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Breakdown of Debt Type25 Trillion Total
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The International Bond MarketBreakdown by
Borrower