BUS325 Fixed Income Instruments

This course provides a comprehensive introduction to the analysis and valuation of fixed income securities and related instruments, with a particular emphasis on how these tools are used in both Norwegian and international financial markets. Students will explore a broad spectrum of interest-bearing instruments—such as government bonds, corporate bonds, FRAs, interest rate swaps, asset swaps, and structured products—and learn how to assess their value, risk, and role in financial decision-making.

A fixed income security is characterized by contractual cash flows determined at issuance. While instruments like sovereign bonds may appear simple in structure, their valuation is highly sensitive to interest rate dynamics. As such, a central theme in the course is how changes in the term structure of interest rates affect bond prices, risk exposures, and portfolio strategies. In addition, students will study instruments with embedded options (e.g., callable and puttable bonds), which introduce path dependency and require more advanced pricing techniques.

The course also covers key concepts in credit risk, distinguishing between investment grade and high-yield securities, and introduces tools to model credit spreads and default probabilities. Liquidity considerations, yield curve theories, and various forms of interest rate risk—such as duration, convexity, and basis risk—are integrated throughout.

The course is designed to bridge theory and practice, preparing students for roles in asset management, banking, treasury, and financial consulting. Given the size and importance of the fixed income market—both globally and in Norway—this course provides essential competencies for anyone aiming to work with financial instruments, manage interest rate risk, or understand how debt markets influence corporate and public-sector financing.

Knowledge

After completing the course, the student should have:

• advanced knowledge of the structure and characteristics of various types of fixed income instruments
• in-depth understanding of arbitrage-free pricing and modeling of interest rate instruments with and without embedded options
• advanced knowledge of theoretical and empirical approaches to credit risk and credit spreads
• detailed insight into theories explaining the shape of the yield curve and approaches to yield curve modeling
• the ability to analyze how interest rate changes, liquidity, and risk interact in the valuation of fixed income securities

Skills

After completing the course, the student should be able to:

• apply pricing models for fixed income securities with and without embedded options
• critically analyze interest rate risk using relevant measures such as duration and convexity
• independently assess credit risk and the pricing of instruments with credit components
• analyze the effects of interest rate volatility and option adjustments on valuation
• compare and evaluate different approaches to modeling the yield curve

General competence

After completing the course, the student should be able to:

• apply their advanced knowledge and skills to solve complex problems related to fixed income management and financing
• communicate in-depth professional analyses and assessments of fixed income instruments and associated risks clearly to both academic and decision-making audiences
• critically reflect on the use of fixed income securities in public and corporate finance
• demonstrate professional integrity in the assessment of interest rate and credit risk, and understand ethical dilemmas in the pricing and use of such instruments