Fixed Income and Credit

Objectives and Learning Outcomes

The objective of the course is to develop understanding of fixed income securities and markets as well as of interest rate derivatives. We study valuation and hedging using these instruments and discuss how these methods are used in practice. At the end of the course, students will understand the institutional aspects and methods of valuation of fixed income securities such as bonds and related instruments, construction of yield curves, valuation and hedging using interest rate derivatives.


Introduction to fixed income markets: Interest rates, yield curves, FRAs, bonds, swaps, caps, swaptions. Short rate models under physical and risk-neutral measures. Diffusion models and term structure equation. Affine models. Two-factor models. Forward rates models: Heath-Jarrow-Morton (HJM) framework. Post crisis changes, multi-curve models. CDS and credit market. Fixed income factor models. Fixed income in a portfolio context. Structured Products.


Series of computer-based exercises in Python. Gathering data on fixed-income securities. Estimation of yield curve models. Relationship between spot, short and forward rates. Developing Python code for bond valuation with and without embedded options. Use of interest rate swaps. Pricing of swaptions. Using Monte Carlo method for simulation of interest rate dynamic with one and two factors including Merton, Vasicek, Cox-Ingesoll-Ross and Hull-White models. Implementation of HJM model. Using CDS data. Estimating valuation adjustments: CVA, DVA, and FVA. Pricing the term structure with linear regressions. Fixed income portfolio analytics.