Class Schedule: Fixed Income Markets, Securities, and Models. Fall, 2015

Week 1

• Introduction:
  • Design of the Course
  • Basic Definitions and Ground Rules.
• The Institutional and Macroeconomic Environment.
  • Related Slides.
    • The Federal Reserve
      • Veronesi -- Section 7.1, pp. 239--244.
      • General Information about the Fed.
      • Link to the Open Market Committee
      • Detailed Summary of Reserve Requirements at the Fed.
      • Comprehensive historical review of the Fed: The Federal Reserve System: Purposes & Functions
      • About the Fed. Educational Resources.
      • `` Open Market Operations in the 1990s,'' by Cheryl Edwards. Federal Reserve Bulletin, November, 1997.
      • Article from Wall Street Journal of August 30, 2002 on the Fed and the Stock Market. (Greenspan remarks.)
      • Setting the Interest Rate. (October, 2002 Economic Letter from the Federal Reserve Bank of San Francisco).
• Fed Funds Futures and Inferring Market Expectations about future Fed Policy.
  • Veronesi -- Section 7.2, pp. 244--254.
  • CME Group: Contract Specifications
  • Related Slides.
  • Spreadsheet with examples.
  • Federal Funds Rate Data

Week 2

Continue from last week.

• Key Learning Objectives from Week 1:
  • What is the Fed?
  • What role does the Fed play in the US and global economies?
  • What is the Fed Funds Rate?
  • How does the Fed influence the Fed Funds Rate? / Why does the Fed target this?
  • What are the properties of Fed Funds Futures Contracts?
• Quiz 1 will be based on pp. 1 - 50 in The Federal Reserve System: Purposes & Functions.

• Payment of Interest on Reserves at the Fed started in October 2008. Generally the rate will be the target federal funds rate minus 10 basis points. In the current environment financial institutions earn 25 basis points on their required and excess reserves with the Fed. With the target Fed Funds rate at 10 basis points, it's not hard to imagine what is going on at present in the Fed Funds market.
  • Chairman Bernanke on how this will help manage monetary policy, and how this rate can exceed the target federal funds rate.
  • Gerald Dwyer on the effect this had on Excess Reserves.
• The Federal Reserve's Balance Sheet.
• Primary Dealers.

• Example of inferring market expectations of future Fed policy.
• Margin on Fed Funds Futures Contracts.
• Bloomberg Screen with the Description of Fed Fund Futures Contracts.
• Bloomberg Screen with the Implied Probabilities of future Fed policy.
• Slides used for my brief presentation on the recent liquidity crisis at the October 1, 2008 Community Roundtable.
• 2015 Review notes on Fed Funds Rate Futures.
• 2015 Review spreadsheet on Fed Funds Rate Futures.

Week 3

Overview of Fixed Income Markets

• Veronesi -- Chapter 1, pp. 3--28.
• Web page of SIFMA The Securities Industry and Financial Markets Association.
  • Historical Ratings Transitions Data (from Moody's).
  • 2013 Annual Global Corporate Default Study And Rating Transitions, from Standard & Poor's.
  • 2012 Annual Global Corporate Default Study And Rating Transitions, from Standard & Poor's.
  • Moodys Report Corporate Default and Recovery Rates 1920 - 2010.
  • Moodys 2008 Ratings Transition Data.
  • Moodys Special Comment After Enron and WorldCom.

Week 4

Quiz 3 will cover Garbade and Ingber, ``The Treasury Auction Process: Objectives, Structure, and Recent Adaptations, Federal Reserve Bank of New York Current Issues in Economics and Finance, February 2005.

The United States Treasury and its Borrowing.

• Related Slides.
• Treasury Site With Frequently Asked Questions.
• Treasury Site Containing Auction and buy-back results.
• The Treasury STRIPS Program is described at this site.
• ``The Benchmark U.S. Treasury Market: Recent Performance and Possible Alternatives,'' by Michael J. Fleming, Economic Policy Review, Federal Reserve Bank of New York, April, 2000.
• Dominique Dupont and Brian Sack on the Market for Treasury Securities. From The Federal Reserve Bulletin, December, 1999.
• Kenneth Garbade on the history of the Primary Treasury Market. From Economic Policy Review, Federal Reserve Bank of New York, May, 2004.
• Spreadsheet example of the ``Long Term Capital Trade'' to capture the On-the-Run Premium.
• Treasury Inflation-Indexed Securities
  • Handy Treasury webpage with information on TIPS.
  • Spreadsheet with examples.
  • Link to US Department of Labor, CPI page.
  • Computation of Holding Period Return on a TIPS Investment Example.
  • Example of Benchmarking a Treasury to Underlying STRIPS.
• Corporate Bond Fact Sheet and example.
• Check out some recent prospecti:
  1. Verizon Communications $49 billion debt offering of September 2013
  2. Actavis $21 billion debt offering of March 2015.
  3. Norfolk Southern issue of $300 million 6 3/4% 10-Year and $700 million 7 1/4% 30-Year notes. (Filed February 2, 2001.)
  4. Merck issue of $25 million floating rate notes. (Pricing Supplement, Filed March 10, 2004.)
     • (Which is a supplement to this Medium Term Notes Prospectus supplement, dated December 5, 2001. Merck's Medium Term Note Program: $2.4 billion.)
  5. Pfizer 0.80% 7-Year Notes 60 billion Yen. (Filed May 11, 2001.)

Week 5

Basics of Fixed Income Securities

Veronesi, Chapter 2
• Spreadsheet with our in-class example of bond valuation.
• Spreadsheet showing bootstrapping the yield curve; also spot and forward rates.

Week 6

Continuation from last week

• Related Spread Sheet.
• Orange County I Case Study -- Veronesi pp. 61 -- 71.
  • Accompanying Spreadsheet.

Week 7

Interest Rate Risk Management

• Veronesi, Chapter 3 pp. 73 -- 99.
• Related Spread Sheet.
• Sketch of related results from the calculus.

Week 8

• Dyanmic Immunization Example (Using VBA).
• Orange County II Case Study -- Veronesi pp. 103 -- 112.

Week 9

• Convexity and Butterfly Trades
  • Veronesi, Chapter 4.1 pp. 113 -- 126.
  • Form ``Butterfly Arbitrage" Portfolios using:
    • Bloomberg BBA.
    • Zero-net Investment Portfolio.
    • Notes to accompany the spreadsheet material on spread trades.
    • In Class Example of Long Convexity portfolios: October 8, 2008 through October 28, 2008.

Week 10

• Convexity and Butterfly Trades 2.
• Veronesi, Chapter 4.2 pp. 126.
• Classic Paper: Common Factors Affecting Bond Returns, by Litterman and Scheinkman.

• Principal Components Analysis.
  • Orange County Case III. Veronesi, pp. 142 -- 151.
  • Use Matlab to identify principal components, and explore the structure of interest rates.
• Data file with 0-Coupon Treasury Yields.
• Spreadsheed with constant maturity US Treasury yields October, 1987 through January 2002.
• Related Slides.
• `A Tutorial on Principal Components Analysis,'' by Lindsay I Smith.
• ``A Tutorial on Principal Components Analysis,'' by Jonathon Shlens. (This is more advanced than the Smith tutorial.)
• Introduction to Matlab for Windows, by Januj.
• Matlab function to compute the principal components (as a .m file).
• pdf file of the Matlab function to compute the principal components.

Week 11

• Trading and Risk Management with Principal Components
• Spreadsheet with Relative Value Trade -- using Principal Components. Also includes Holding Period Return Computation with P&L Attribution Analysis.
• User's guide to the P & L Attribution Analysis Spreadsheet.

Week 12

Forward Rates, Forward Rate Agreements, and Forward Contracts

• Veronesi Sections 5.1 -- 5.3, pp. 154 -- 171.
• Spreadsheet with spot and forward rates.

Week 13

Interest Rate Swaps

• Veronesi Sections 5.4 -- 5.5, pp. 171 -- 183
• How an interest rate swap works.

Week 14

Swap Spread Trades

• PiVe Capital Case (What could possibly go wrong?). Veronesi: pp. 189 -- 198.

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