Course Detail

Fixed Income Asset Pricing (35130)

Course Description by Faculty

  • Heaton, John
  • Content

    The universe of fixed income instruments is large and ever more complex. Besides standard fixed-coupon bonds, several other types of securities are available for investment and trade, from inflation indexed securities (TIPS) to floating-rate notes, from mortgage backed securities to debt instruments issued by government agencies, such as Fannie Mae, Freddie Mac, and Ginnie Mae. In addition, a large market of exchange traded and over-the-counter derivative securities is available for trade in order to undertake sophisticated hedging strategies or to adjust the risk/return characteristics of an investment portfolio.


    This course covers models and techniques that are used to analyze fixed income securities their (often embedded) derivatives. By the end of the course, students will learn (i) the basic concepts of fixed income instruments, such as yield curve, forward curve, yield-to-maturity, duration, convexity; (ii) the modern empirical methodologies to describe Treasury bond data, such as "curve fitting" and factor analysis; (iii) effective hedging strategies for fixed income portfolios, such as duration matching, asset-liability management and factor neutrality; (iv) the advanced properties of bonds, such as their risk/return characteristics, and the best predictors of their future returns; (v) modeling techniques used by market participants, such as the models of Vasicek, Cox Ingersoll and Ross, Ho and Lee, Hull and White, Black-Derman-Toy, and Heath-Jarrow-Morton; and, importantly, (vi) how to use these methodologies in practice to value and hedge fixed income products and derivatives, from the traditional securities, such as Bonds, Swaps, Options, Caps and Floors, to the more recent products, such as Inverse Floaters, Range Notes, Mortgage Backed Securities.


    The key feature of this course is that it strongly emphasizes the applications of these methodologies to value real world fixed income products, and their derivatives, by focusing both on the practical difficulties of applying models to the data, as well as on the necessity to use computers to compute prices. The course, which is analytical in nature, includes many real world Case Studies and Data Analysis to allow students to apply these models to a wide range of fixed income securities as well as to understand their risk and return characteristics.

  • Prerequisites
    Business 35000: strict.
    • Strict Prerequisite

  • Grades
    • Allow Provisional Grades (For joint degree and non-Booth students only)

    • Early Final Grades (For joint degree and non-Booth students only)

  • Syllabus
  • Spring 2024Section: 35130-81M 6:00PM-9:00PMGleacher Center204In-Person Only
Description and/or course criteria last updated: June 27 2023