The goal of this course is to provide a solid understanding of the five major debt markets (Corporate; Government and Agency; Municipal; Mortgage backed, asset backed, and collateralized debt obligation; Funding) and of their recent derivative appendices (swaps, CDS). The course will describe the major players in the market, key institutions, broad empirical regularities, and analytical tools used for pricing and risk management.
The course will have analytical as well as institutional sections as both are needed to describe the appropriate framework and analyze the corresponding pricing and risk management tools and related issues. The course covers 24 topics organized around a theme. For some lectures, class notes will be used in addition to or in lieu of references. We will have about 6 guest lecturers specialists of some of those areas (for instance, the municipal market, the CDO market, MBS CDOs, the commercial real estate market, and derivative markets).
Outline of Key Topics:
- Overview of Debt Securities: What are debt securities? What are their sources of risk and return? Historical performance of fixed income securities.
- Major players and their functions: United States Treasury, Federal Reserve Banks, Primary Dealers, Inter-Dealer Brokers (IDB), Rating agencies, Sell-side and Buy-side institutions.
- Bond mathematics: a) price and yield conventions, b) PVBP, Duration (modifird, effective and key-rate), convexity, and negative convexity. Trading applications: spread trades, bullet vs barbell positions.
- Term Structure Theory: Spot rates, forward rates, par yields, modeling interest rates and pricing bonds.
- Structural models of default: Modeling credit risk, credit spreads and their behavior, Distance to default, forecasting rating changes, high-yield and investment-grade debt markets
- Government, Agency and Corporate markets
- Municipal markets
- MBS: Structure of MBS markets, prepayments, Option Adjusted Spreads, Pass-through securities, REMICs, risk measures
- Asset-backed markets
- Derivatives: Treasury futures, Interest Rate Swaps, and Single-name credit default swaps
- Clearinghouses vs exchanges vs OTC markets
Robert W. Lear Professor of Finance and Economics
Charles M. Jones is the Robert W. Lear Professor of Finance and Economics and the Director of the Program for Financial Studies at Columbia Business School, where he has been on the faculty since 1997. Professor Jones studies the structure of securities markets, liquidity, and trading costs, and he is particularly noted for his research on short sales, algorithmic and high-frequency trading, and the variation in...