Fixed Income Securities

This course covers the valuation and application of a wide variety of fixed income securities and their derivatives. Fixed income securities are financial claims including pure discount bonds, coupon bonds such as Treasury notes and corporate bonds, floating rate notes, callable bonds, among many others, issued by public or private entities. In the first half of the course, we focus on yield curve construction, duration and convexity, and formal term structure models. The goal is to introduce you to at least one equilibrium model and one no-arbitrage model, and to analytical tools used in interest rate modeling and risk management. In the second half of the course, we first focus on interest rate derivatives such as interest rate swaps, bond options and interest rate options, including caps, floors and swaptions, and the management of callable debt. The course looks beyond interest rate risk, and study other risks that can be inherent in fixed income securities such as credit risk, illiquidity risk, and the risks stemming from securitization. The course concludes with a discussion about credit default swaps – a fixed income derivative that is popular for transferring credit risks among market participants. Among topics not covered in the course are taxes, foreign exchange risk, the relations between macroeconomic variables and interest rates, as well as multi-factor models.