Fixed Income Securities: Dit?usp Sharing

Fixed Income Securities
https://docs.google.com/document/d/113SjKIe13cpmBgo_QfX05ARvnY5LBNjscjqGCCoSSM/e
dit?usp=sharing

● 이 과목은 중간고사 기말고사 등 시험이 없습니다.
● 팀 프로젝트도 없습니다.
● 지각 = 결석 (being late = missing a class)

Course Requirements and Assignments
● There is no ordinary midterm, final or any exam . I do not want to test you with the
knowledge readily available in wikipedia or textbook.
● Your term papers, presentations and homeworks will determine your grade.
● You should write a term paper about fixed income securities.
● You are expected to master excel vba and R.
● A student per class will present the textbook (1015 min).
● Student presentation schedule

Writing an English article
● Use short sentence
● Do not use complex sentences. I recommend subjectverbobject type sentence.
● Do not use long paragraph. Six to seven sentences per paragraph would be fine.
● The first sentence of a paragraph should be a good topic sentence
● The series of the first sentence in each paragraph should construct a nice storyline. So,
check whether this storyline is logical and flows well.
● Do your best about articles such as a, the, etc.
● There should be a research question and answers to the question.

Term paper format
*
Use this storyline and format . You will fail this course if you do not observe this guideline.
* Please use APA format for your references. See the following example.
* Kang, H. G., Joo, H. H., & Cho, J. (2014). Brandsize complementarity in the choice of
retail stores. Applied Economics Letters, 21(6), 413416.
* The other part of your paper should follow the guideline below.
*
http://aom.org/publications/amj/styleguide/
* If you cite a paper in the body of the text like (Kang, Joo and Cho, 2014), this should be
specified in the reference list at the end of the paper.
* If an article is in the reference list, it should be mentioned at least once in the main body.
*
Sample and further guideline

● 이 수업은 아주 쉽습니다.
● 예습 및 선행학습 불필요. 쓸데없이 시간 낭비 하지 마세요.
● 중학교 수준의 수학으로도 충분합니다.
● 재무에 관한 사전지식 전혀 필요 없습니다.
● 중요한 사항은 한국어로 복습합니다.

If you take following lectures beforehand, your life would be easier.
● You can also learn R at MOOC as follows (by the order of easiness)
● https://www.codeschool.com/courses/tryr
● http://www.rstudio.com/resources/training/onlinelearning/#R
● https://www.coursera.org/course/rprog
● https://www.edx.org/course/kix/kixkiexplorxexplorestatisticsr1524
● Or find manuals at http://cran.rproject.org/manuals.html
● Data for practice

Class materials
■ Fixed Income Securities: Valuation, Risk, and Risk Management , Pietro Veronesi
(University of Chicago, Booth School of Business), January 2010, ⓒ2011. PPT slides
■ https://class.coursera.org/fe1001/lecture
■ https://class.coursera.org/fe2001/lecture

Course Requirements and Assignments
● Attendance, attitude and class participation: We will discuss a lot. This class should be
very interactive.
● We have students presentations every week. I will assign presentation topics.
○ If necessary, students can use presentation materials at:
https://drive.google.com/folderview?id=0B9soGjgURHI7bjFGbFZTZXJ5U0U&usp
=sharing&tid=0B9soGjgURHI7RFo0SEJ6ZEI4Unc
● Students may want to type their homework and submit. In particular, neither handwritten
figures nor equations will be accepted.

Important papers
* Fama, E. F., & Bliss, R. R. (1987). The information in longmaturity forward rates. The
American Economic Review , 680692.
* Cochrane, J. H., & Piazzesi, M. (2005). Bond Risk Premia. The American Economic Review,
95 (1), 138160.

Notes
● Honor Code
● Regrading Policy
● Teaching statement
● Office hour: send an email to detail the issues you plan to discuss and make
appointment

Wk01 0304: Class introduction: Presentation assignment
Wk02 0306: Veronesi ch02 (2.12.3): Student presentation
● Mathematical constant ,
natural logarithm , bond basics
Wk03 0311: Veronesi ch02 (2.42.5): Student presentation
● Bring your laptop
● Taylor series expansion
Wk04 0313: Veronesi ch02 (2.8)
● BOK interest rate cut (12 March 2015)
● Floating rate bond
● HW (1): Post your research question at the bulletin board of our class before next Wed
class starts. You have to convince readers that your research question is original,
interesting and important.
● HW (2): Write R code for Taylor series approximation for sin(x) by next Wed class. Print
out your code and solution, and submit it at the beginning of Wed class. You need to
show how approximation errors decrease as the order of approximation increases.
● Hw (3): Implement Bootstrapping described in the section 2.4.2. using R.
● Sample R code and exercise
● Taylor series expansion (review)
● Duration and convexity
Wk06 0320: Veronesi ch03 (3.33.4)
● Implicit government subsidy vs public enterprise, stateowned company
● HW: (1) Find 5 related papers and summarize them with your own words in about
200words essay each. Post your homework at the bulletin board of our class before
next Wed class starts. You can use google scholars ( ,
tip1
tip2,

tip3
). (2) Prove MaCaulay
Duration is same to modified duration under continuous compounding. Attach your
solution PDF file into your post about (1). (3) Write R code to compute MaCaulay
duration. Attach your solution PDF file into your post about (1). (4) Replicate Table 3.3
with Excel. Analyze how results would change as interest rates change. Post this to the
bulletin board.
● Implicit government subsidy illustration
● Ch09: One Step Binomial Trees (
excel) (
Google spreadsheet ) (
large tree )
Wk08 0327 Veronesi ch04 (4.1) Student presentation
● HW: Find 5 more related papers and summarize them with your own words in 200words
essay each. Post your homework at the bulletin board of our class before next Fri class
starts. You can use google scholars ( tip1,
,
tip2
tip3
). Please write comprehensive
literature review with all 10 papers. The literature review should be an essay ( example).
Wk09 0401: Student presentation
Wk10 0403: Student presentation
excel ) (
large tree
)
Wk11 0408: Student presentation Veronesi ch05 (5.34)
excel ) (
large tree
)
● HW (1): due 0410. Please describe your data. Some of you may not have started
collecting your data. However, you should at least have some ideas on what kind of data
you will use, how you will collect the data, what sources you will use, etc. You can
describe them. The data can be secondary database, qualitative data, cases (name of
firms, etc), interviewee, etc.
● HW (2): due 0415. Please fill out this form , print out and submit to both class discussion
board and to me at the beginning of the class.
● HW (3): due 0415. Please develop R program for the value of swap contract. And then
recover your initial zero coupon bond price using the swap rates you generated.
excel ) (
large tree
,
png
)
excel ) (
large tree
,
png
)
Wk14 0417 Veronesi ch08 (8.18.2 without example 8.2)
● HW (Due 12:59 PM May 1st): (1) Write the draft term paper. Please integrate all your
work and assignment you had submitted. You should keep in mind the term paper format
described in the first page of this syllabus. Please submit your draft term paper to
chanseunghee [at] gmail.com (2) Develo an R code to compute IRR (internal rate of
return) using R optimization (‘ optim ’).
Wk15 0422 MID TERM EXAM
Wk16 0424 MID TERM EXAM
Wk17 0429 Veronesi ch08 Example 8.2 (p.298); Ch10: MultiStep Binomial Trees
● HW (1): Prepare your term paper presentation file and then upload it to the discussion
board (due 6th May before class starts). Presentation format is at
https://sites.google.com/site/hyoungkang/5page
● HW(2): Implement Veronesi ch08 Example 8.2 (p.298) with R. Submit source code to
chanseunghee [at] gmail.com (due 8th May before class starts)
● ( excel) (
large tree ,
png)
Wk18 0501 Veronesi ch08 (8.3 without example 8.3); ArrowDebreu Securities; HoLee model
● Ch11: Risk neutral trees and derivative pricing
● ( excel) (
large tree ,
png)
● Google spreadsheet for HoLee and BDT
Wk19 0506 Veronesi ch08 Example 8.3 and Effective Duration (p.301); HoLee model
● Due date for the final submission of term papers “June 17th 23:59”. Submit to
chanseunghee [at] gmail.com
● ( excel) (
large tree ,
png)
● HW: Implement HoLee model with R. Use the example here
. Generate theta’s and
ArrowDebreu securities. Submit to chanseunghee [at] gmail.com (Due 13th May before
class starts)
Wk20 0508 Veronesi ch08 Example 8.4; BDT model; Intermediate cash flows; American Option;
Callable Bonds
● (excel) (
large tree
,
png
)
● Chapter 12: AMERICAN OPTIONS
● HW: Implement HoLee model and BDT model with R. Use the data here. Generate
theta’s and ArrowDebreu securities. Submit to chanseunghee [at] gmail.com (Due 20th
May before class starts)
Wk21 0513 Veronesi ch01;
● Chapter 14: INTEREST RATE MODELS IN CONTINUOUS TIME
● Term Paper (Due 23:59 June 13th): Please submit your final term paper to
chanseunghee [at] gmail.com Use this storyline and format
. You can use
https://www.copykiller.co.kr/

### Optimization Example (UPDATED) ######################
myfunc < function(x,y){
z < (x[1]y[1]*10)^2 +(x[2]y[2])^2 + 100
return(z)
}
sols < optim(c(.5,.5), myfunc, y=c(1,2), gr = NULL, method = "LBFGSB",
lower = 10, upper = 100,
control=list(fnscale=1), hessian = FALSE)
sols$par # This is where minimum value occurs
sols$value # This is the minimum value of the function

## in order to fix some input in x, we need to define another function
# This is necessary to estimate HoLee model
myfunc2 < function(x,y,t){ # up to t, we know theta
x[1:t] < 1
z < myfunc(x,y)
return(z)
}
sols < optim(c(.5,.5), myfunc2, y=c(1,2), t=1, gr = NULL,
method = "LBFGSB",
lower = 10, upper = 100,
control=list(fnscale=1), hessian = FALSE)
sols$par[2] # This is where minimum value occurs
sols$value # This is the minimum value of the function
###################

Wk22 0515 Miscellaneous
Wk23 0520
● Check 6/10 and 6/12 student presentations
● CDS and moral hazards: Amherst Holdings at Austin ( link1,
link2): How to solve the
moral hazard problems in CDS market?
● Chapter 14: INTEREST RATE MODELS IN CONTINUOUS TIME
● Convertible bond (delay)
Wk24 0522
● Fundamental PDE and HoLee model
● HW due 0527: Let interest rate follows: drt = (θt − γ*rt) dt + σdzt. Then derive the zero
coupon bond price. You should exactly follow the step described in the link for HoLee
Model. In particular, you can completely solve the integration when theta is constant.
Submit to chanseunghee [at] gmail.com (Due 27th May before class starts)
Wk25 0527 Convertible bond (김영훈) and HullWhite Model
Wk26 0529 Chapter 15: NO ARBITRAGE AND THE PRICING OF INTEREST RATE
SECURITIES
● Vasicek model (15.2.3)
● HW: Estimate Vasicek model (r.bar and gamma) with R ( hint: c15 slide pp2224 ). Use
the data here
and assume the volatility of interest rate is 2.21%. Submit to
chanseunghee [at] gmail.com (Due 0604 before class starts).
Wk27 0603 Chapter 17: RISK NEUTRAL PRICING AND MONTE CARLO SIMULATIONS
● Estimation
● Option pricing (15.3)
● CoxRossIngersoll model (15.4.2)
● Simulating interest rate process
● Pricing (Practice with zero coupon bond pricing)
Wk28 0605 Chapter 21: FORWARD RISK NEUTRAL PRICING AND THE LIBOR MARKET
MODEL
● LMM (Libor Market Model) (21.4)

=================================
=================================
=================================

Binomial interest rate models (
details
)

*
Bond forward, bond futures, caplets, floorlets, swap, swaption (
google spreadsheet
)
*
Model calibration and BlackDermanToy model
*
Credit default swaps
Getting started with excel vba
Black Scholes Model
Check
this term paper format
Binomial tree example for interest rate derivatives
VBA Optimization

Credit default swaps
https://www.dropbox.com/s/gh0pw5lb6ohqfb3/commodity130224.docx
Chap08: Mortgage backed securities

1. Veronesi ch03 (3.2)
Duration and convexity

2. Veronesi ch03 (3.33.4)

9. Veronesi ch08 (8.18.2 without example 8.2)
Passthrough securities

10. Veronesi ch08 Example 8.2 (p.298)
11. Veronesi ch08 (8.3 without example 8.3)
12. Veronesi ch08 Example 8.3 and Effective Duration (p.301)
13. Veronesi ch08 Example 8.4

VBA for binomial tree model
Arrow Debreu Securities @ Binomial Model (option and futures)

Simplico;

Real option note
No arbitrage
Black Model and Black Scholes Model (VBA Practice)
Tactical asset allocation and investors’ sentiments
http://www.utstat.utoronto.ca/sjaimung/courses/mmf1928/main.htm

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