FE580 Securitization of Financial Assets

Course Catalog Description

Introduction

This course provides a theoretical and practical analysis of the asset-backed security market. Topics include: Duration And Convexity of Bond Yields, Price Dynamics of Mortgages and Cash Flows, Default Risk, Interest Rate Volatility, Interest Rate Risk Management of Mortgage-Backed Securities, Securitization, Corporate Debt and The Securitization Markets, Asset-Backed Commercial Paper, Collateralized Loan Obligations, Structuring Synthetic Collateralized Loan Obligations, Securitization of Revolving Credit, Financial Derivatives and Their Use as Hedging Tools. Half of the course is in the Hanlon Financial Systems Lab, where theoretical models are illustrated with real scenarios.

Campus	Fall	Spring	Summer
On Campus
Web Campus

Instructors

Professor	Email	Office
Jonathan Kaufman	jonathan.kaufman@stevens.edu	Babbio 303A

More Information

Course Description

Students will learn the techniques needed to understand securitization.

Course Outcomes

At the end of this course, students will be able to:

Value fixed-income securities.
Understand and measure risk associated with such securities, i.e. credit risk, interest rate risk and prepayment risk.
Have a grasp on how to hedge against some of those risks, using financial derivatives.
Understand corporations and banks' incentives for using securitization.
Use computer simulation for financial analysis.
Use a Bloomberg screen and interpret data associated with asset-backed securities transactions.

Course Resources

Textbook

The Securitization Markets Handbook: Structures and Dynamics of Mortgage-and Asset-Backed Securities, Second Edition, by Charles Austin Stone and Anne Zissu - Wiley 2012.

Grading

Grading Policies

H.W 50% Project 50%

Lecture Outline

Topic Reading

Week 1 Bond and Mortgage Basics Bond Valuation Ch. 2

Week 2 Price/Yield Relationship Fixed-Rate Mortgages Prepayment Option Ch. 1 & Ch. 2

Week 3 Macauley and Modified Duration, Convexity, Risk Exposures Ch. 2

Week 4 Sub-Prime Mortgages,Securitization, The Liquidity problems of August 2007 Ch. 1 & Ch. 9

Week 5 From the Primary to the Secondary Mortgage Market The Agency Market
The Private-Label Market Agency and Nonagency Market Segments Compared Credit Risk Considerations Mortgage and Funds Flow in the Secondary Market Industry Illustration Pricing of Newly Originated Mortgages Freddie Mac Sample Purchase Pricing Mortgage Pricing from the Bank's Perspective
Ch. 1
Page 3-18 Page 18-25 Page 72-77 Ch. 10

Week 6 Modeling Cash Flows of Pass-Through, PO, and IO Securities
Information Set Model Cash Flow over Time Effective Duration Effective Convexity
Chapter 3
Page 121-129 Chapter 3 Page 109-111

Week 7 Case Study: A Pass-Through Security Issued by FNMA
Prepayment Standard Assumption Levels S-Curve Prepayment Function Weighted Average Life and Different Spreads Measurements Spread I, Static Spread (Spread Z), and Spread S
Chapter 3
Page 111-117

Week 8 Option-Adjusted Spread
Negative Option Cost Case Study: Principal-Only and Interest-Only Securities PO Strip IO Strip
Chapter 3
117-129

Week 9 CMOs, PACs, Floaters, and Inverse Floaters
Collateralized Mortgage Obligations
Chapter 4
Page 131-141

Week 10 Planned Amortization Class
Floaters and Inverse Floaters CDO-Squared
Chapter 4 Page 141-154
Page 154-159

Week 11 Credit Risk
Direct Financing of Risk versus Buying a Financial Guaranty A Financial Guaranty Is Not an Insurance Contract Selecting Efficient Forms and Levels of Credit Enhancement Relative Value in Credit-Enhancement Structures
Chapters 10 and 11

Week 12 Investment, Speculation, and Hedging
Target Investment Subordinate Segment of Private-Label MBSs Interest-Rate Risk
Chapter 9

Week 13 Reinvestment of Cash Flow
Interest-Only Strips as a Hedging Tool Combining Bonds and IOs Hedging FNMA 9.5 Percent Pass-Through Securities with IO Securities Hedging FNMA 9.5 Percent Pass-Through Securities with IO Securities Principal-Only Strips as a Hedging Tool Inverse Floaters as a Hedging Tool Hedging CMOs with Options on Treasury Bonds
Chapter 9

Week 14 Final Exam

FE580 Securitization of Financial Assets

Introduction

Course Description

Course Outcomes

Textbook

Grading Policies

FE575 Introduction to Econophysics

2020 Fall FE570 Market Microstructure and Trading Strategies

Yash Deelip Karbhari

Neeharika Rachavelpula

Vivek Ashok Kumar Herur

	Topic	Reading
Week 1	Bond and Mortgage Basics Bond Valuation	Ch. 2
Week 2	Price/Yield Relationship Fixed-Rate Mortgages Prepayment Option	Ch. 1 & Ch. 2
Week 3	Macauley and Modified Duration, Convexity, Risk Exposures	Ch. 2
Week 4	Sub-Prime Mortgages,Securitization, The Liquidity problems of August 2007	Ch. 1 & Ch. 9
Week 5	From the Primary to the Secondary Mortgage Market The Agency Market The Private-Label Market Agency and Nonagency Market Segments Compared Credit Risk Considerations Mortgage and Funds Flow in the Secondary Market Industry Illustration Pricing of Newly Originated Mortgages Freddie Mac Sample Purchase Pricing Mortgage Pricing from the Bank's Perspective	Ch. 1 Page 3-18 Page 18-25 Page 72-77 Ch. 10
Week 6	Modeling Cash Flows of Pass-Through, PO, and IO Securities Information Set Model Cash Flow over Time Effective Duration Effective Convexity	Chapter 3 Page 121-129 Chapter 3 Page 109-111
Week 7	Case Study: A Pass-Through Security Issued by FNMA Prepayment Standard Assumption Levels S-Curve Prepayment Function Weighted Average Life and Different Spreads Measurements Spread I, Static Spread (Spread Z), and Spread S	Chapter 3 Page 111-117
Week 8	Option-Adjusted Spread Negative Option Cost Case Study: Principal-Only and Interest-Only Securities PO Strip IO Strip	Chapter 3 117-129
Week 9	CMOs, PACs, Floaters, and Inverse Floaters Collateralized Mortgage Obligations	Chapter 4 Page 131-141
Week 10	Planned Amortization Class Floaters and Inverse Floaters CDO-Squared	Chapter 4 Page 141-154 Page 154-159
Week 11	Credit Risk Direct Financing of Risk versus Buying a Financial Guaranty A Financial Guaranty Is Not an Insurance Contract Selecting Efficient Forms and Levels of Credit Enhancement Relative Value in Credit-Enhancement Structures	Chapters 10 and 11
Week 12	Investment, Speculation, and Hedging Target Investment Subordinate Segment of Private-Label MBSs Interest-Rate Risk	Chapter 9
Week 13	Reinvestment of Cash Flow Interest-Only Strips as a Hedging Tool Combining Bonds and IOs Hedging FNMA 9.5 Percent Pass-Through Securities with IO Securities Hedging FNMA 9.5 Percent Pass-Through Securities with IO Securities Principal-Only Strips as a Hedging Tool Inverse Floaters as a Hedging Tool Hedging CMOs with Options on Treasury Bonds	Chapter 9
Week 14	Final Exam