Finance "Fixed Income Securities"

Course Description

This course is fully devoted to analysis of fixed income, bond markets. The objective of the class is to introduce tools for evaluating bonds and making decisions about trading and hedging portfolios of fixed income securities. The main focus is on government bonds and derivative securities associated with them. We will consider basic ways to price these bonds using techniques that are well established on Wall St. The class will introduce basic trading strategies based on exploiting mispriced securities. Such strategies are profitable when risks are minimized, and so we will discuss several ways to measure and minimize risk. We discuss the pricing of derivative securities such as bond options and swaps. Other topics include repo financing, mortgage markets, and basic issues involving default risk of corporate bonds.

The class uses Bloomberg and MS Excel Spreadsheet applications extensively. Assignments will involve use of live data and simulated trading strategies based on quote data accessed through the Bloomberg/ Excel terminal in the library. Students must have access to MS Excel spreadsheets with Visual Basic enabled (this excludes Apple computers).

Fixed income analysis is generally mathematical in nature, so students are advised that the class will have a lot of quantitative material.

Course materials

Required textbook: Tuckman, Bruce. "Fixed Income Analysis: Tools for today's markets." Second ed, Wiley Finance. Available in UW bookstore.

Recommended additional reading: Martinelli, Priaulet and Priaulet, Fixed Income Securities: Valuation, Risk Management and Portfolio Strategies

Other materials: Overhead slides (distributed), excel spreadsheets w/ Visual Basic Macros (no knowledge of Visual Basic is expected or required). These will be made available below.

The TA is Zhong Zhuang

Homeworks

The class requires problem sets to be turned in. You can work in groups of up to three students. I advise but do not require that students work in groups. If you work in a group you can turn in a single homework.

Exams

Homeworks (20%), Midterm (30%), Final (50%)

Dates TBA.

Office hours

Eraker: Wed 3-4:30, office 5274A.

Zhuang: Thurs 2:3:30, office 5284

Overview (tentative)

1. Introduction to bond markets

2. Review of basic bond pricing concepts (ch. 2-3). Excel spreadsheet with ytm computations here.

3. The discount function (ch. 1). Excel Spreadsheet here.

4. Curve fitting (ch. 4). Excel spreadsheet here.

5. Cheap/rich and other trading strategies (ch 4)