Debt Markets

The course will describe the major players in Debt Capital Markets, key institutions, broad empirical regularities, and analytical tools that are used for pricing and risk management. Some parts of the course will be analytical while others will be largely institutional. Each session will be organized around one or two key topics. In addition, class notes will be used to supplement and clarify issues. Some selected papers will also be kept in Canvas to serve as background reading for class discussions.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 (modified, 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