How to build a fixed income securities course: a complete guide for lecturers

Central question: What makes a security fixed income, and how do contractual cash flows, seniority and embedded features change the way it should be analysed?

Start by giving students a market map before asking them to price anything. Fixed income spans sovereign bonds, corporate debt, floating-rate notes, securitised products, money-market instruments and derivatives. The common thread is contractual cash flows, but the risks differ because maturity, coupon type, seniority, optionality, collateral, currency and issuer quality change the economics.

What this concept covers

• Market participants: sovereigns, corporates, banks, insurers, pension funds, asset managers and dealers.
• Bond features: par value, coupon, maturity, settlement, seniority, security, callable and putable structures.
• Government, agency, corporate, municipal, emerging-market and securitised debt.
• Primary versus secondary markets and the role of dealers, benchmarks and electronic trading.
• The distinction between contractual cash flows and the market value of those cash flows.

Learning outcomes

By the end of this concept, students should be able to:

• Classify major fixed income instruments by cash-flow structure and risk.
• Explain how seniority, security and optionality affect investor claims.
• Distinguish primary issuance from secondary-market trading.
• Map the main participants and incentives in fixed income markets.
• Identify the risk factors that should be analysed before valuation.

How to teach it

• Bring three term sheets into class: a sovereign bond, a senior unsecured corporate bond and an MBS summary.
• Ask students to mark every promised cash flow, contingent cash flow and investor protection.
• Use a market map to connect issuers, intermediaries and end investors.
• Close with a classification exercise rather than a formula.

Case-style example

HarbourGrid Utilities has three securities outstanding: a £100 million 4.0% senior secured bond due in 2029, a £60 million 6.5% subordinated note due in 2032 and a callable £40 million floating-rate note at SONIA + 225 bps. Students map the cash flows, rank claims in liquidation and identify which risk changes first if policy rates rise 150 bps. Two answers can be defended depending on whether the focus is price sensitivity or refinancing pressure. Students discover that “debt” is not one homogeneous exposure.

Where students struggle

Students often classify securities by issuer name rather than by the actual claim. Make them read the legal and cash-flow features first, then discuss the issuer.

Reading and a quick check

Use the overview and introductory chapters of Tuckman and Serrat. End with a five-minute security-classification check: cash-flow type, seniority, benchmark, main risk and likely investor base.

Where it leads

The market map gives students the vocabulary required for the pricing and yield mechanics that follow.

Central question: How do promised cash flows become a market price, and why can yield-to-maturity be a misleading summary of return?

This is the mechanical foundation of the course, but it should be taught as a pricing language rather than a calculator exercise. Students need to move confidently between price, discount factors, coupon, accrued interest, clean and dirty price, yield conventions and total return while recognising that a single yield compresses many assumptions.

What this concept covers

• Present value of fixed cash flows and discounting.
• Clean price, dirty price, accrued interest and settlement conventions.
• Yield-to-maturity, current yield, holding-period return and realised return.
• Compounding conventions, day-count conventions and money-market quotations.
• Reinvestment risk and the limitations of yield-to-maturity.

Learning outcomes

By the end of this concept, students should be able to:

• Price a coupon bond from discount rates.
• Calculate and interpret clean price, accrued interest and dirty price.
• Compute and compare common yield and return measures.
• Explain why realised return can differ from yield-to-maturity.
• Diagnose quotation and compounding errors.

How to teach it

• Use one bond and force students to price it under two compounding conventions.
• Separate the pricing equation from the market quotation convention.
• Ask students to reconcile a dealer quote with a cash settlement amount.
• Require a short written explanation of when YTM is useful and when it is not.

Case-style example

Northgate Rail has a £1,000 face-value bond with a 5% annual coupon, four years remaining and a market price of £972. A second bond with the same issuer and maturity pays 2.5% semi-annually and trades at £981 clean with £8 accrued interest. Students compute dirty prices, approximate yields and one-year holding returns if market yields fall 40 bps. One bond offers the higher running coupon while the other can deliver the stronger price return. Students discover that yield, cash income and total return answer different questions.

Where students struggle

Students often treat yield as a cash-flow fact rather than a market-implied summary. Repeatedly ask what assumptions are hidden inside the quoted yield.

Reading and a quick check

Assign Tuckman and Serrat Chapters 1 and 3. Quick check: ask students to explain in one sentence why a bond can have a coupon above its YTM and still be fairly priced.

Where it leads

Once students can price a single bond, they can build the discount curve that prices many bonds consistently.

Central question: How do we extract a term structure from market prices, and what does the curve imply about discounting and future rates?

The yield curve is the organising object of fixed income. Students should learn to distinguish par yields, spot rates and forward rates, bootstrap discount factors from market instruments, and explain how curve shape affects valuation. The goal is not merely to draw an upward-sloping line but to connect observed market prices to internally consistent discounting.

What this concept covers

• Par, spot and forward curves.
• Bootstrapping zero-coupon discount factors.
• Interpolation and curve construction choices.
• Forward-rate agreements and implied future rates.
• Curve shifts, steepening, flattening and twists.

Learning outcomes

By the end of this concept, students should be able to:

• Bootstrap spot rates from a set of par instruments.
• Convert between discount factors, spot rates and forward rates.
• Explain the economic meaning and limitations of implied forward rates.
• Value cash flows using a term structure rather than one YTM.
• Describe common curve movements and their valuation effects.

How to teach it

• Give students four short-maturity instruments and ask them to build the first points of a zero curve.
• Compare a flat-shift assumption with a steepening scenario.
• Use a live or supplied government curve and ask what changes when the two-year rate moves without the ten-year rate.
• Require students to label par, zero and forward curves separately.

Case-style example

Meridian Treasury observes one-year and two-year zero rates of 3.8% and 4.2%, while a three-year 4.5% annual-coupon government bond trades at 100.40. Students bootstrap the three-year spot rate, calculate the one-year forward rate beginning in year two and reprice a three-year 5% corporate cash-flow stream using the zero curve. A macro team argues the forward rate predicts policy; a relative-value team argues it embeds term premia. Students discover that a forward rate is a pricing object before it is a forecast.

Where students struggle

Students often mix par yields, zero rates and forwards. Make them state which curve they are using before every calculation.

Reading and a quick check

Assign Tuckman and Serrat Chapter 2. Quick check: give two spot rates and ask students to derive the implied forward rate, then write one sentence on why it is not automatically a forecast.

Where it leads

The curve provides the benchmark against which interest-rate sensitivity and relative value can be measured.

Central question: How much will a fixed income position move when rates change, and which risk metric is appropriate for the move you are testing?

This concept moves students from valuation to risk. Modified duration, DV01, key-rate duration and convexity are not competing formulas; they answer different questions about local price sensitivity, curve shape and non-linearity. Good teaching makes students reconcile the metric with the scenario rather than memorise definitions.

What this concept covers

• Macaulay and modified duration.
• DV01 and dollar duration.
• Key-rate and partial duration.
• Convexity and second-order price effects.
• Immunisation, hedging error and the limits of parallel-shift assumptions.

Learning outcomes

By the end of this concept, students should be able to:

• Calculate and interpret duration and DV01.
• Estimate bond price changes for small yield moves.
• Use convexity to improve a duration-based estimate.
• Identify when key-rate duration is more informative than one-factor duration.
• Construct a basic duration hedge or immunisation strategy.

How to teach it

• Give the same rate shock to a short coupon bond and a long zero-coupon bond.
• Require a price-change estimate first with duration, then with duration plus convexity.
• Use a non-parallel curve shock and ask why a single duration fails.
• Finish with a hedge ratio rather than another standalone calculation.

Case-style example

Cedar Pension Fund holds £25 million of a 15-year gilt with modified duration 10.4 and convexity 138, and £18 million of a five-year corporate bond with duration 4.1. The CIO wants portfolio DV01 below £28,000 while preserving at least £35 million market value. Students calculate current DV01, estimate the loss from a 60 bp parallel rise and propose a hedge using a five-year government future with £72 DV01 per contract. Two hedges meet the limit but leave different curve exposure. Students discover that matching one duration metric does not eliminate all rate risk.

Where students struggle

Students often apply modified duration to large or non-parallel moves and then blame the formula. Make them diagnose whether the error comes from convexity, basis risk or curve shape.

Reading and a quick check

Assign Tuckman and Serrat Chapters 4 and 5. Quick check: ask which of DV01, key-rate duration or convexity is most useful for a 25 bp twist between two-year and ten-year rates, and why.

Where it leads

With rate sensitivity in hand, students can ask why the curve moves and whether changes reflect policy expectations, risk premia or market positioning.

Central question: What drives the level and shape of the yield curve, and how should investors distinguish expectations from term premia?

Fixed income analysis becomes genuinely applied when students connect mathematics to macroeconomic information. The yield curve reflects expected short rates, inflation compensation, risk premia, supply and demand, positioning and liquidity. A course should teach students to form a rate view and then test whether the proposed trade actually expresses that view.

What this concept covers

• Expectations hypothesis and term premia.
• Nominal versus real yields and inflation compensation.
• Central-bank policy transmission and forward guidance.
• Curve steepeners, flatteners, butterflies and carry/roll.
• Supply-demand effects and the difference between directional and relative-value views.

Learning outcomes

By the end of this concept, students should be able to:

• Interpret curve shape using more than one economic explanation.
• Separate expected policy rates from term-premium narratives.
• Explain nominal, real and inflation-linked bond relationships.
• Design a simple curve trade consistent with a stated macro view.
• Identify carry, roll-down and downside risks in that trade.

How to teach it

• Use a current or archived policy meeting and a pre-supplied yield curve.
• Ask teams to write a three-line macro view, then express it with one trade.
• Force them to state the scenario that would make the trade lose money.
• Compare a duration-neutral curve trade with a directional long-duration position.

Case-style example

Aster Macro Fund sees the two-year government yield at 4.30%, the ten-year at 4.65% and ten-year inflation-linked real yield at 2.05%. The team expects 75 bps of policy easing over 12 months but fears heavy long-dated issuance. Students choose between a long ten-year duration trade, a 2s10s steepener and an inflation breakeven position, then calculate the move required to offset 35 bps of adverse carry. Different trades can express the same macro narrative. Students discover that a view is not a strategy until exposures are specified.

Where students struggle

Students often say “rates will fall” without specifying which maturity, by how much, over what horizon or relative to what is already priced.

Reading and a quick check

Assign Greenwood, Hanson and Vayanos (2024) alongside Tuckman and Serrat Chapter 8. Quick check: ask students to separate three possible causes of a steeper curve into expectations, risk-premium and supply-demand channels.

Where it leads

The next stage grounds those ideas in the government bond and repo markets that provide the benchmark curve and collateral infrastructure.

Central question: Why can the safest credit instruments still experience severe price and liquidity stress?

Government bonds are the benchmark assets of fixed income, but “risk-free” refers only to a narrow default concept. Students should understand auctions, on-the-run and off-the-run liquidity, repo financing, dealer balance-sheet constraints, flight-to-quality behaviour and the possibility of market-function stress even in sovereign markets.

What this concept covers

• Government bond issuance and auction mechanics.
• On-the-run versus off-the-run benchmarks.
• Repo, haircuts and securities financing.
• Liquidity metrics: bid-ask spread, depth and price impact.
• Dealer intermediation, leverage and market-function interventions.

Learning outcomes

By the end of this concept, students should be able to:

• Explain how government bonds are issued and financed.
• Calculate the economics of a simple repo trade.
• Distinguish credit safety from liquidity and market-function risk.
• Interpret common liquidity measures.
• Analyse how dealer capacity and forced selling can amplify rate moves.

How to teach it

• Use the March 2020 Treasury episode or the 2022 gilt episode as a market-function case.
• Have students trace one leveraged position through cash bond, repo and derivative legs.
• Ask why off-the-run bonds can cheapen in a dash for cash.
• Use a debrief that separates solvency, liquidity and market microstructure.

Case-style example

Orion Relative Value buys $80 million of an off-the-run Treasury at 98.50, finances 97% in overnight repo at 4.1% and shorts a nearby futures contract as a hedge. Repo haircuts rise from 3% to 8% while the cash bond cheapens 1.25 points relative to the future. Students calculate the additional cash required and mark-to-market loss, then decide whether to unwind, fund the margin or switch collateral. The trade is close to duration-neutral but still fragile. Students discover that funding liquidity can dominate credit quality.

Where students struggle

Students often assume government bonds are “risk-free” in every sense. Make them name default, duration, inflation, liquidity, funding and basis risks separately.

Reading and a quick check

Assign Duffie (2023) or O’Hara (2023). Quick check: ask students why a Treasury position can lose money during a flight to safety even when credit risk is negligible.

Where it leads

Once the benchmark curve and liquidity infrastructure are clear, students can analyse the additional spread demanded for corporate credit risk.

Central question: What portion of a corporate bond spread compensates for expected credit loss, and what portion reflects liquidity, risk premia and market conditions?

Corporate credit should connect the issuer’s business and capital structure to a traded spread. Students need to move beyond ratings as labels and analyse leverage, coverage, free cash flow, covenants, recovery assumptions, sector risk and liquidity. The objective is to explain why two bonds with the same rating can trade at different spreads.

What this concept covers

• Government spread, Z-spread, option-adjusted spread and spread duration.
• Ratings, migration risk and market-implied credit risk.
• Probability of default, loss given default and expected loss.
• Leverage, interest coverage, free cash flow and refinancing risk.
• Liquidity, issue size, seniority and covenant effects on spreads.

Learning outcomes

By the end of this concept, students should be able to:

• Calculate and interpret common spread measures.
• Connect issuer fundamentals to credit quality.
• Estimate expected loss from default and recovery assumptions.
• Explain why ratings and spreads can diverge.
• Form a relative-value view between corporate bonds.

How to teach it

• Give students two bonds with the same rating but different balance sheets and issue sizes.
• Ask them to build a spread bridge from benchmark rate to credit and liquidity components.
• Use a rating migration scenario to connect fundamentals to price.
• Require a buy, hold or avoid recommendation rather than a descriptive credit memo.

Case-style example

Valeon Packaging and Crestline Software are both rated BBB. Valeon has 3.8x net debt/EBITDA, 4.2x interest coverage and a €600 million bond at government + 185 bps. Crestline has 1.9x leverage, 7.5x coverage and a smaller €150 million bond at +205 bps. Students estimate one-year expected loss using 1.8% and 0.8% default probabilities with 45% recovery, then explain the residual spread. One team prefers Valeon for liquidity; another prefers Crestline for credit. Students discover that spread is not a pure default-probability measure.

Where students struggle

Students can over-rely on ratings or on one leverage ratio. Require an explicit distinction between default risk, recovery risk, liquidity and market risk premium.

Reading and a quick check

Assign Tuckman and Serrat Chapter 14 plus Kargar et al. (2021). Quick check: ask students to explain why a smaller, less liquid but less leveraged issuer might trade at a wider spread.

Where it leads

After students can analyse secondary-market credit, they can examine how debt is structured and priced in the primary financing decision.

Central question: How should a borrower and its lenders structure a debt package when amount, price, maturity, security and covenants all interact?

This concept bridges fixed income security analysis with primary-market financing. It is particularly useful for showing that yield is only one term in a complete debt package. Investors and issuers negotiate amount, maturity, amortisation, seniority, collateral, guarantees, covenants and default protection alongside pricing.

What this concept covers

• Primary issuance and refinancing process.
• Debt capacity, leverage and interest coverage.
• Pricing, maturity, amortisation and call protection.
• Security, guarantees, seniority and subordination.
• Financial, affirmative and negative covenants; covenant-lite structures and events of default.

Learning outcomes

By the end of this concept, students should be able to:

• Evaluate a borrower’s debt capacity.
• Compare lender and borrower objectives in a refinancing.
• Interpret the principal terms of a debt agreement.
• Assess how security and covenants alter risk allocation.
• Recommend a coherent financing package rather than isolated terms.

How to teach it

• Start with a corporate bond or loan term sheet and remove the pricing line. Ask what else still determines risk.
• Split the room into issuer and investor teams.
• Require every requested covenant to be linked to a specific risk.
• Debrief the total package rather than ranking teams only on spread.

Case-style example

SoftBridge Systems has €42 million adjusted EBITDA, €110 million existing debt and wants a €95 million refinancing. Borrowers propose 5.0x total leverage, 375 bps pricing, five-year maturity and covenant-lite terms. Lenders propose 4.0x, 475 bps, four-year maturity, first-lien security and a 5.25x springing leverage covenant. Students calculate pro-forma leverage and annual cash interest, then trade price against flexibility. One package is cheaper but tighter; the other costs more but protects liquidity. Students discover why debt terms must be judged as a package.

Where students struggle

Students often optimise one term at a time, especially coupon or spread. Force them to articulate the complete exchange of borrower flexibility for lender protection.

Reading and a quick check

Use the live Debt Financing Simulation teaching concepts and Tuckman and Serrat Chapter 14. Quick check: ask students to name two ways a lower spread can be offset by more restrictive non-price terms.

Where a simulation fits

Use after students can analyse credit spreads and basic debt capacity. The simulation turns the primary financing package into a live lender-borrower negotiation over amount, pricing, maturity, repayment, seniority, security, guarantees and covenants. Debt Financing Simulation

Where it leads

The next concept asks what happens when the capital structure becomes unsustainable and contractual priority begins to determine recovery.

Central question: When enterprise value falls below the face value of claims, who absorbs the loss and what determines a defensible recovery?

A fixed income course needs a downside framework. Distressed bonds are not simply high-spread versions of healthy bonds. Students must understand claim priority, enterprise value, liquidity, covenant breaches, recovery waterfalls, restructuring alternatives and bargaining between senior creditors, junior creditors and equity.

What this concept covers

• Indicators of financial distress and unsustainable leverage.
• Priority of claims and recovery waterfalls.
• Enterprise value, collateral value and recovery assumptions.
• Haircuts, amendments, waivers, exchanges and debt-for-equity outcomes.
• Out-of-court restructuring versus formal insolvency.

Learning outcomes

By the end of this concept, students should be able to:

• Identify when a capital structure has become unsustainable.
• Calculate indicative recoveries by claim priority.
• Compare stakeholder incentives in distress.
• Evaluate restructuring alternatives and concessions.
• Write a recovery-based investment or negotiation recommendation.

How to teach it

• Begin with a capital structure whose claims exceed enterprise value.
• Make students calculate the waterfall before they negotiate.
• Assign creditor roles with different reservation outcomes.
• Debrief why legal priority constrains but does not fully determine negotiated outcomes.

Case-style example

Redstone Transport has €260 million enterprise value against €210 million first-lien debt, €140 million second-lien debt and €90 million equity book value. Students calculate the strict-priority recovery if first-lien claims recover at par before junior claims. Management argues enterprise value could reach €320 million after a turnaround; junior creditors demand equity upside in exchange for a haircut. Students compare a liquidation-style waterfall with a negotiated going-concern plan. Two outcomes can be rational depending on confidence in the turnaround. Students discover that recovery analysis combines valuation, legal priority and bargaining.

Where students struggle

Students often treat recovery as a fixed percentage attached to a rating. Make them build it from enterprise value, claim priority and scenario assumptions.

Reading and a quick check

Assign a restructuring note and the Debt Restructuring Simulation case description. Quick check: ask which variable matters more to a junior creditor, face value of its claim or enterprise value remaining after senior claims.

Where a simulation fits

Use after claim priority and recovery waterfalls. Students represent Lien 1, Lien 2 or Equity in the Big Truckers case, set haircuts, calculate recoveries and negotiate an out-of-court agreement. Debt Restructuring Simulation

Where it leads

Once students can analyse cash bonds in healthy and distressed states, the course can add derivatives that transfer or hedge rate and credit exposures.

Central question: How can investors reshape interest-rate exposure without selling the underlying cash bond portfolio?

Derivatives belong in a fixed income course because many professional risk decisions are implemented through futures and swaps rather than outright bond trades. Students should understand the cash-flow logic, hedge ratios, basis risk and the economic equivalence between changing a fixed-rate exposure and overlaying a derivative.

What this concept covers

• Floating-rate note reset mechanics and discount margin.
• Government bond futures, cheapest-to-deliver logic at a high level and DV01 hedging.
• Interest-rate swaps: fixed versus floating cash flows and par swap rates.
• Hedge ratios and basis risk.
• Credit default swaps as a credit-risk transfer instrument.

Learning outcomes

By the end of this concept, students should be able to:

• Value simple floating-rate and swap cash-flow structures.
• Use futures or swaps to alter portfolio duration.
• Calculate a basic DV01 hedge ratio.
• Explain basis risk between cash securities and derivatives.
• Compare cash-bond and CDS expressions of credit risk.

How to teach it

• Use a fixed-rate corporate bond and ask how to turn its rate exposure into floating without selling it.
• Calculate a hedge ratio using DV01 before discussing contract mechanics.
• Run one basis-risk scenario where the hedge works imperfectly.
• Keep advanced option pricing optional unless the cohort is quantitative.

Case-style example

Rivermark Insurance owns £50 million of a seven-year fixed-rate bond portfolio with DV01 of £31,500. The CIO wants to cut DV01 to £12,000 for the next policy meeting without selling bonds. A five-year swap has DV01 of £4,250 per £10 million notional and a government future has £68 DV01 per contract. Students design a receive-floating/pay-fixed swap hedge or futures hedge and compare basis risk if corporate spreads widen 40 bps. Both reduce rate risk but neither removes spread risk. Students discover that a hedge only neutralises the factor it is designed against.

Where students struggle

Students often call a hedge successful if portfolio P&L is flat in one scenario. Make them identify the residual spread, curve, basis and convexity exposures.

Reading and a quick check

Assign Tuckman and Serrat Chapters 11 to 14 selectively. Quick check: ask students why a duration hedge with government futures can still lose money when corporate spreads widen.

Where it leads

Derivatives prepare students to analyse securities whose own cash flows contain embedded options, especially mortgages and callable debt.

Central question: How do prepayment, extension and collateral behaviour change the cash flows and duration of securitised fixed income?

Securitised products show why fixed income cash flows are not always fixed. Mortgage borrowers can prepay, collateral pools amortise, tranches redistribute cash flows and embedded options alter duration and convexity. The teaching aim is to connect borrower behaviour to investor risk rather than to reproduce a full structured-finance model.

What this concept covers

• Mortgage amortisation and pass-through structures.
• Prepayment and extension risk.
• Negative convexity and option-adjusted spread.
• ABS collateral performance, waterfall and tranche seniority.
• Agency versus non-agency credit exposure.

Learning outcomes

By the end of this concept, students should be able to:

• Explain how securitisation transforms underlying loan cash flows.
• Analyse prepayment and extension risk.
• Interpret negative convexity in mortgage-backed securities.
• Compare agency and credit-sensitive securitised exposures.
• Assess how collateral assumptions change investor returns.

How to teach it

• Start from one amortising mortgage before moving to a pool.
• Show how falling rates can shorten MBS duration through refinancing.
• Compare a callable corporate bond with a mortgage pool to connect optionality.
• Use scenario analysis rather than a full prepayment model for non-quantitative cohorts.

Case-style example

HomeArc MBS has £120 million principal, 4.2% weighted-average coupon and an estimated effective duration of 4.8 at current rates. If mortgage rates fall 100 bps, expected prepayments rise and duration falls to 3.1; if rates rise 100 bps, duration extends to 6.4. Students estimate first-order price changes in both scenarios and explain why the upside from falling yields is weaker than the downside from rising yields. A portfolio manager may still prefer the security for spread carry. Students discover the practical meaning of negative convexity.

Where students struggle

Students often expect all bond duration to lengthen mechanically with maturity. Mortgages force them to treat borrower behaviour as part of the security.

Reading and a quick check

Assign Tuckman and Serrat Chapter 15. Quick check: ask students to explain why a mortgage-backed security can become longer duration when rates rise.

Where it leads

The final concept integrates pricing, curve, credit, liquidity and optionality into portfolio decisions with explicit risk limits.

Central question: How should an investor combine bonds to meet return objectives and liability constraints while controlling rate, curve, credit and liquidity risk?

The final concept should make students assemble the course rather than learn one more instrument. Portfolio construction in fixed income is constraint-driven: duration targets, liability cash flows, spread limits, liquidity needs, capital requirements and benchmark risk all shape the feasible portfolio. Students should defend exposures, not simply maximise yield.

What this concept covers

• Ladders, barbells, bullets and cash-flow matching.
• Immunisation and duration matching.
• Key-rate and spread risk limits.
• Asset-liability management for insurers and pension funds.
• Performance attribution: carry, roll, rates, spread and security selection.

Learning outcomes

By the end of this concept, students should be able to:

• Construct a fixed income portfolio for a stated mandate.
• Match or immunise liability cash flows at a basic level.
• Set and monitor duration, curve and credit limits.
• Attribute portfolio return to major fixed income drivers.
• Defend a portfolio choice under competing return and risk constraints.

How to teach it

• Give each team a different mandate: pension fund, bank treasury and unconstrained bond fund.
• Use the same security set so differences come from objectives rather than information.
• Require a risk budget before a security list.
• Close the course with a portfolio defence in which the lecturer shocks rates, spreads or liquidity.

Case-style example

Northshire Pension Plan must meet £12 million, £18 million and £25 million liability payments in years 3, 7 and 12. It can invest £48 million across three bonds with durations 2.7, 6.5 and 11.2, yields of 4.1%, 4.8% and 5.4%, plus cash at 3.6%. Students design a portfolio with duration between 7.0 and 7.8, at least £6 million liquidity and no more than 35% in BBB credit. One team maximises yield; another prioritises liability matching. Students discover that the “best” bond portfolio depends on the mandate and constraints.

Where students struggle

Students often rank bonds by yield and then retrofit a portfolio story. Make them start with liabilities, risk budget and liquidity constraints.

Reading and a quick check

Use Tuckman and Serrat’s fixed income asset-management material and the Bank of England LDI case. Quick check: ask students to state which portfolio constraint they would relax last, and why.

Where it leads

This capstone brings the full course together: cash flows, curve, duration, liquidity, credit, optionality and judgement.

10-week course structure

A 10-week course should compress related concepts rather than remove credit, duration or portfolio integration. Combine pricing with market foundations, combine the curve with return measures, and integrate derivatives with securitised products.

14-week course structure

A 14-week version creates space to separate curve construction from risk, add a dedicated performance-attribution session and run both simulations with fuller preparation and debriefing.

The Debt Financing Simulation places students in the refinancing of Softie, a private equity-backed software company. Teams act as lenders or borrowers and use company, financial and market evidence to prepare competing positions before negotiating one complete debt package. The live page describes an approximately three-hour core format and team-based delivery for undergraduate, postgraduate and MBA cohorts.

Why it fits here

• Students already know how leverage, coverage and credit quality affect spread.
• The activity forces them to connect amount, pricing, maturity, repayment, seniority, security, guarantees and covenants.
• Different lender and borrower incentives create a defensible disagreement rather than one mechanically correct answer.

What students do

• Review the Information Memorandum, company evidence and industry comparables.
• Borrower teams prepare borrower-friendly terms; lender teams prepare lender-friendly terms and a negotiation strategy.
• Negotiate loan amount, interest rate, maturity, amortisation, security, guarantees, seniority, covenants and other protections.
• Respond to alerts and news during structuring.
• Finalise the complete financing termsheet and compare the outcome with other negotiation groups.

Recommended course placement

• At the end of Session 8 after corporate credit and debt-capacity teaching.
• Across two class meetings if the timetable cannot accommodate the full activity.
• Before an individual financing memo or oral defence so students can explain which terms they traded and why.

Knowledge students should have before the simulation

• Basic debt and equity knowledge.
• Leverage, interest coverage and debt capacity.
• How benchmark rates and credit risk affect financing cost.
• Seniority, security and covenant basics.

Delivery format

Suggested debrief questions

• Which term created the largest economic difference between lender and borrower positions?
• Was the final debt amount defensible under a downside EBITDA case?
• Which covenant protected a real risk and which one mainly reduced borrower flexibility?
• What did the borrower gain in exchange for any higher pricing or stronger security?
• Would you buy the resulting debt in the secondary market at the agreed spread, and why?

The Debt Restructuring Simulation puts students into an out-of-court restructuring of Big Truckers. The company has €500 million of debt and equity claims but €260 million of enterprise value. Teams represent Lien 1, Lien 2 or Equity, analyse claim priority, set proposed haircuts, calculate recoveries and negotiate a collective restructuring outcome.

Why it fits here

• Students already know that enterprise value is insufficient to cover all claims.
• The simulation turns a static recovery waterfall into a negotiation over concessions, priority and alternatives.
• Comparing teams that began with the same role makes reasoning visible for debrief and optional assessment.

What students do

• Review the Big Truckers case, historical information and role-specific mission.
• Assess the assigned claim, likely recovery and alternative if no agreement is reached.
• Enter a proposed haircut and observe the resulting recovery percentage and recovery value.
• Negotiate with Lien 1, Lien 2 and Equity teams to reach an out-of-court agreement.
• Compare final recoveries, agreement status and outcomes with teams representing the same role.

Recommended course placement

• At the end of Session 9 after priority-of-claims and recovery teaching.
• As one intensive 2 to 3-hour class or divided across shorter sessions.
• Before an individual distressed-credit memo or recovery defence.

Knowledge students should have before the simulation

• Basic debt and equity fundamentals.
• Enterprise value and priority of claims.
• Recovery percentage and haircut calculations.
• Difference between out-of-court restructuring and a failed agreement.

Delivery format

Suggested debrief questions

• Which stakeholder had the strongest legal priority and did that translate into the strongest negotiated outcome?
• At what enterprise value would the junior claim begin to recover under strict priority?
• Which haircut was economically defensible relative to the no-agreement alternative?
• Did any team protect its own recovery so aggressively that it destroyed collective value?
• How would your recommendation change if going-concern enterprise value were 20% higher or lower?

Grading with the Debt Financing Simulation

The simulation involves lender and borrower teams analysing Softie and negotiating a complete refinancing package. The platform records team decisions, agreement status and comparative outcomes. Use those outputs as evidence to interrogate the reasoning rather than as an automatic grade.

• Debt-capacity judgement: amount, leverage, maturity and ability to service the package.
• Financing-package coherence: pricing alongside repayment, seniority, security, guarantees and covenants.
• Evidence use: whether company and market data support the team’s position.
• Negotiation logic: which concessions were made and whether the final package remains defensible.
• Individual evidence outside the platform: short assumptions note, viva or reflection tied to a specific term.

Grading with the Debt Restructuring Simulation

The simulation involves Lien 1, Lien 2 and Equity teams analysing Big Truckers, setting haircuts, calculating recoveries and negotiating an out-of-court restructuring. Recovery and agreement data can support assessment, but the professor still judges the quality of analysis and any individual contribution.

• Priority and recovery analysis: whether the team correctly links enterprise value to the assigned claim.
• Stakeholder strategy: whether proposed haircuts and concessions reflect the role’s legal and economic position.
• Agreement quality: whether the group reaches a collective deal without ignoring the no-agreement alternative.
• Sensitivity: how the recommendation changes under a different enterprise-value or bankruptcy-cost assumption.
• Individual evidence outside the platform: short recovery memo or oral defence.