Course Description
Explores the analytical concepts required to price and hedge fixed income securities, with an emphasis on government bonds, swaps, and Eurodollar futures contracts. We will also discuss credit risk models and pricing. Throughout, the emphasis in the class will be on practical applications using current data and securities.
Additional Requirements for Graduate Students:
Graduate students will also complete a guided project in fixed
income which will either be a statistical analysis of interest,
credit risk issues, a working valuation model for interest, or
credit risk products.
Athena Title
Fixed Income Secur and Analysi
Undergraduate Prerequisite
(FINA 3000 or FINA 3000E or FINA 3000H) and (FINA 4310 or FINA 4310E)
Graduate Prerequisite
FINA 7010
Semester Course Offered
Offered every year.
Grading System
A - F (Traditional)
Course Objectives
This class explores the analytical concepts required to price and hedge interest rate and credit risk, with an emphasis on U.S. treasury bonds and their term structure, interest rate swaps, and Eurodollar futures contracts. In addition, we will discuss models of credit risk and learn to price credit default swaps, risky sovereign debt, and simple securitized assets. The emphasis in this class will be on constructing models to accurately value and understand these complex products, using current data and actual securities. Interest rate risk is a technically demanding area and credit risk management is even more so. Students should be extremely comfortable with basic statistical concepts (such as variance, correlation, linear regression, and distributions) and fundamental financial ideas (principally time value of money and compounding). Most importantly, students will develop even more fluency with a spreadsheet program (usually Microsoft Excel), which will be essential to solve the problem sets assigned in the course. In general, the class will follow the pattern of developing both the theory and institutional details of the products and models, followed by a period in which we will build (at least basic) implementations in a spreadsheet environment.
Topical Outline
- Bond markets and a review of time value of money and compounding - The term structure of interest rates and spot and forward curves - Yield shifts and factors - Measures of price sensitivity and hedging bond portfolios - Interest rate swaps - Eurodollar futures contracts, convexity, and hedging swaps - Structural models of credit risk - Reduced form models of credit risk and default probabilities - Pricing asset swaps and credit default swaps - Risky sovereign bond markets: From Argentina to Greece
Syllabus