Course Description:

This course is an introduction to the study of fixed-income securities, that is securities whose payoffs depend on interest rates.  The course is intended for students interested in gaining familiarity with the universe of fixed-income securities, as well as basic concepts pertaining to their valuation and uses.

The following topics will be discussed.

• Overview of trading process, leverage, short selling; (no) arbitrage

• Overview of fixed-income securities

• Basics of bonds, discounting, interest and interest rates, and yields

• US Treasury market

• Understanding and managing interest-rate risk

• Duration, convexity, and factors

• Forward rates, forward rate agreements, and forward contracts

• Futures

• Swaps

• Options: callability/putability, caps/floors, swaptions

• Basic ideas of term-structure modeling

• Corporate bonds

• Credit risk

• Mortgage contracts

• Collateralization and asset-backed securities

Prerequisites:

It will be assumed only that students have some familiarity with basic notions of finance (profit and loss, interest), statistics (mean, variance, regression), and calculus (algebraic equations, systems of linear equations), derivatives.  It would also be helpful to know how to use a software package for numerical computation — Excel would do, thus almost anything would work.

Class Materials:

Copies of the teaching slides will be made available on Canvas for downloading before class. These slides are designed to be self-contained and provide students with everything the course will require of them.

That said, there are a number of textbooks on fixed income, as well as books on derivatives that treat fixed income. Given the length of the course, we would not cover more than a third of a textbook. None is required, though if you already have a choice, or think that you may wish to continue studying fixed income and are looking to get one, here are several recommendations for fixed income:

• Pietro Veronesi, Fixed Income Securities:  Valuation, Risk, and Risk Management, 1st edition, 2010, Wiley. (V)

This is a thorough and rich book, perhaps closest in organization to the course. Most of the material of the course is contained in the first 8 chapters.

• Bruce Tuckman and Angel Serrat, Fixed Income Securities:  Tools for Todays Markets , 3rd edition, 2012, Wiley Finance. (TS)

Nice combination of academic approach and practical detail. Organization differs from course more significantly than V.

• Frank Fabozzi, Fixed Income Mathematics, 4th edition, 2006, McGraw-Hill. (F)

For derivatives:

• Robert McDonald, Derivatives Markets, 3rd edition, Addison Wesley, 2013. (M) A shorter/simpler version is titled Fundamentals of Derivatives Markets.

A nice book, which provides more examples, discussions, and intuition than other books, although it may be a little academic at times.

• John C. Hull, Options, Futures,  and Other Derivatives, 9th edition, Prentice Hall, 2014. (H) A shorter/simpler version is titled Fundamentals of Futures and Options Markets.

This is a very popular book, used widely by practitioners as a reference tool.

All these books are available from online sources, as well as physical bookstores. The actual edition is not crucial; you will just have to identify the relevant sections, which sometimes depend on the edition.

Organization of Classes:

Classes are going to be organized as lectures, delivered in person on the Wash U campus. You will have the presentation slides in advance, and are strongly encouraged to read through them. Annotated slides will be posted after class.

Requirements and Grading:

The grade for the course will be based on two problem sets, each accounting for 15%, and one examination accounting for 70% of the final grade. Class participation can be used as a tie breaker (e.g., decide between a B+ and A– for someone on the edge).