INTERNATIONAL FIXED INCOME Professor Richardson Spring Semester, 2000

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

Outline Description Materials Requirements Topics Perspective

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.

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).

Who Should Take This Course? This course DOES overlap with fixed income (B ) and international (B ), 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 don’t want to take two courses.

Course Materials Collection of presentation slides handed out in class, also available on my webpage: Class handouts of required readings periodically throughout the semester. There is NO good textbook for this class

Course Requirements Exams –Midterm (40%): in class, March 1 –Final (60%): May 8 (8:30-10:30am) 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

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)

Important Topics We Don’t 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

Perspective

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

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

Where Does International Come In to Play? With the globalization of financial markets, it’s 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.

Share of Various Currencies in Transactions (1998)

The World Bond Market (1998) G7 Countries and Other (excluding emerging markets)

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

Breakdown of Debt Type $25 Trillion Total

The International Bond Market Breakdown by Borrower