FE580 Securitization of Financial Assets

Course Catalog Description


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


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:

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

Course Resources


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 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


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