FIN 740 - Analysis of Fixed Income Securities

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 topics include the comparison of prices of different government, default free bonds, methods for extracting zero coupon and forward rate curves from treasury coupon bonds, and methods for measuring the risks of bonds. We discuss derivative markets including options, forwards and swaps. The second part of the course is devoted to models of the term structure, including short term interest rates. We discuss binomial trees and random simulation. We discuss and develop models for bonds that are subject to possible default, including corporate bonds and sovereigns, and credit default swaps (CDS). The final topic concerns mortgage backed securities.

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.


We meet regularly in 2510.

Office hours

Eraker: Thurs at 5:20 in 5274A

Yue Wu (TA): Online by appt.


30% midterm, 20% homework, 50% Final.


Homeworks require electronic submission. They will be due on Fridays at noon.


Midterm: Thursday March 17 Final : Friday May 13 I

Course materials

Part I. Markets.

1. Introduction to bond markets

2. Review of basic bond pricing concepts. Excel spreadsheet with ytm computations here.

Problem set 1

3. Computing in Fixed Income. Excel files from other lectures.

4. No-arbitrage discount functions. Excel Spreadsheet here.

Problem set 2

5. Curvefitting. Excel Spreadsheet here.

6. Forward Rates.

Problem set 3

7. What determines the level of interest rates?.

8. Homework Review.

9. Duration I

10. Duration II.

Problem set 4

11. Eurodollar and Fed Fund futures

12. Swaps I. Excel Spreadsheet here.

13. Swaps II + review of midterm material.

14. Midterm review.

15. Midterm.

16. Midterm solutions.

Part II. Modeling interest rates

17. Interest rate trees.

18. Interest Rate Trees II (BDT model). Excel Spreadsheet here.

Problem set 5

19. Vasicek and CIR models. Excel Spreadsheet here.

20. Options. Excel Spreadsheet here.

Problem set 6

21. Credit Risk I Excel Spreadsheet here.

22. Credit Risk II .

23. Credit Default Swaps .

24. Guest lecture. Rich Gross.

25. Mortgage Backed Securities I .

26. Mortgage Backed Securities II .

27. Review.