The TA for this class is Danjue Shang. She resides in the PhD student carrels in Room 315. Her e-mail address is dshang@email.arizona.edu . Her office hours are M 10:30 - noon and W 12:30 - 2:00.
Required Materials:
- Book:
- Fixed Income Securities, (John Wiley) , by Pietro Veronesi.
- I expect you to subscribe to The Wall Street Journal and read it daily.
- The Economist is also recommended reading.
Institutional and Intellectual Context of the course:
This class serves as an introduction to debt securities as well as the behavior of interest rates.
Management of debt and obtaining capital and working capital at the lowest cost is an important part of corporate finance. CFOs and corporate treasurers work with commercial and investment bankers to structure their liabilities. To such managers a basic knowledge of the Fixed Income environment is critical.
On Wall Street, Fixed Income securites run the gammit from the staid, traditional US Treasury securities to complex Collaterized Debt Obligations. A big part of this course is an introduction to the institutional context of fixed income. As an example, Mortgage Backed Securities provide an early example of financial engineering. Why do such securities exist? What is the role of the US Government (via Ginnie Mae), and Government Sponsored Enterprises, such as Fannie Mae and Freddie Mac?
Traditionally, Fixed Income has been the most quantitative area within finance. The (ironic) reason for this is that the securities tend to simpler than equity securities. The simplicity of the securities' cash flows suggests that there should exist tools to evaluate the value and riskiness of fixed income securities.
Perhaps the most important situation in the financial markets over the past fifty years has been the credit crisis which started in the summer of 2007. The catalyst for this credit event is the fall in house prices in both the United States and the United Kingdom. Placed in a backdrop of extraordinarily liberal credit standards for home buyers means that credit risks are high and potentially lurking in unexpected places. Investment Banks, Commercial Banks, and Hedge Funds with exposure to mortgage credit are especially vulnerable. The surprise unwinding of Bear Stearns in March, 2008 (terminating in the purchase of Bear Stearns by J.P. Morgan-Chase on May 30, 2008), facilitated by federal regulators, is but one example of the consequences. A consequence of this is that matters relating to the world of fixed income have moved from the back office to the headlines.
The most surprising event in Wall Street history was the bankruptcy of Lehman Brothers in September, 2008. This clarified the severity of the on-going financial crisis, but it muddied the waters in terms of governmental involvement and the concept of too big to fail. My slides on the evolution of the 2007--20?? financial crisis.
In mid-2015 the effects of this financial crisis are still reverberating through the world economy. Attention has shifted to European sovereign debt and the Greek banking crisis seems to be an unending drama. This has led to fragility of the Euro, and has brought the stability of European banks into question. In the face of this a flight-to-quality in financial markets keeps yields on US Treasury securities at historically low levels. As we enter the fall of 2015 financial markets are focused on the question of when the US Federal Reserve will raise its federal funds rate target from the 0 - 25 basis point target, where it has been since Fall, 2008.
Context of the course within the curriculum:
This course is complementary to several other courses in our Finance curriculum. Specifically:
- FIN 523A and 523B -- Applied Portfolio Management. FIN 523 entails the management of a ``balanced fund'' that has a benchmark that includes both fixed income and equity. Students involved with the fixed income component must take this class. In Applied Portfolio Management, you put to work the skills and tools developed in this class.
- FIN 521 -- Investment Analysis. FIN 521 provides a framework for understanding risk and return in financial markets.
- FIN 522 -- Derivatives. FIN 522 develops more deeply students' ability to evaluate derivative securities. The emphasis in FIN 522 is on equity derivatives. There is overlap in terms of the mathematical tools used in modeling financial securities.
- FIN 525 -- Empirical Modeling. FIN 525 is concerned with estmating model parameters from financial data, and using statistical methods to ask important questions of the data.
- FIN 544 -- Interest Rate Models. Here, the focus is on the properties of treasury securities and their derivatives. These securities do not have any default risk (despite the recent ratings downgrade by Standard & Poor's). If we think about corporate bonds, a natural way to proceed is to view them as a treasury plus a default piece--that depends on the fortunes of the issuer. Modeling this default piece is one of the most interesting and active areas for research in Finance, and is the focus of FIN 545.
- FIN 545 -- Credit Risk Modeling. In depth analysis of the models used
to measure and price credit risk. Special attention is paid to instruments
and institutions that are specific to credit exposures.
Conduct of Course and Grading:
With the exception of the first class, every class will start with a 25 minute quiz (time approximate). The quizzes are designed to verify that you are mastering the basic skills from the last class and/or to ensure that you are staying on task with the reading assignments. Of the 13 quizzes, the lowest may be dropped and your class grade will be the average of the remaining 12. The exception is that the last quiz, Quiz 13 (on December 3), may not be dropped.
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Evacuation ProceduresMap of the first floor of McClelland Hall for Evacuation Purposes.
Sun Aug 16 10:11:01 MST 2015