Practitioner course in fixed income
Bond Pricing and the Yield Curve
Bond pricing and the yield curve from first principles to desk practice: price and yield, duration and convexity, bootstrapping and fitting curves, carry and roll-down, and hedging a bond portfolio's interest rate risk.
Bond pricing is the base of every valuation: a price is a stream of cash flows discounted on a curve. This course teaches how bonds are priced and quoted, how the yield curve is built from the market, and how traders measure and hedge the risk that rates move. It is the first course of the fixed income track.
What is the yield curve, and why does everyone watch it?
The yield curve shows the interest rate for each maturity. Its level sets the cost of money, its slope tells you what the market expects of future rates, and its shape changes before recessions. Desks build it every morning from bills, bonds and swaps, and every price in the bank depends on it.
How is the course taught?
Audio lessons give the general subject, explainer films show curves being built and bent, and the workbooks hold worked examples, Python notebooks and cheat sheets of the market conventions. The final lab receives written feedback from the faculty.
Who is this course for?
Quants, risk analysts and systematic investors who need fixed income. It counts toward the Certificate in Systematic Investing, the Certificate in Derivatives Pricing and the Certificate in Quantitative Portfolio Management, and so toward both the Professional Diploma in Algorithmic Trading and the Fellowship in Computational Finance.
What you will be able to do
- Price a bond from its cash flows and a discount curve, and convert between price and yield.
- Measure and hedge rate risk with duration, convexity and key-rate durations.
- Bootstrap a zero curve and fit a Nelson-Siegel curve to market prices.
- Compute carry and roll-down and explain curve trades such as steepeners and butterflies.
Syllabus, module by module
Price and yield
Discounting, coupons, accrued interest, day counts and yield to maturity.
Duration and convexity
Sensitivity to rates, the second-order correction and key-rate durations.
Building the curve
Bootstrapping zero and forward rates from bills, bonds and swaps.
Fitting the curve
Nelson-Siegel and spline fits, and spotting cheap and rich bonds.
Carry, roll-down and curve trades
Expected return of a bond position, steepeners, flatteners and butterflies.
Hedging a portfolio
Hedging with futures and swaps, and what principal components say about curve risk.
How the certificate is earned
Graded problem sets and a final lab: build a government yield curve from market prices and hedge a bond portfolio against it. On a pass you receive the Course certificate in Bond Pricing and the Yield Curve, issued by the Institute with a verification code. Read how certification works.
Before you start
The instruments and conventions of Financial Markets and Instruments, and the mathematics of the foundation courses.
This course counts toward
- Certificate in Systematic InvestingOne semester of twelve courses and a capstone on rule-based investing over months and years: asset pricing, trend, factors, carry, allocation and the portfolio construction and risk control that hold them together.
- Certificate in Quantitative Portfolio ManagementOne semester of twelve courses and a capstone on building portfolios with numbers: mean-variance and its failures, robust optimisation, Black-Litterman views, factors, asset allocation, bonds, attribution and risk.
- Certificate in Derivatives PricingDerivative pricing in one semester of ten courses and a capstone, from stochastic calculus to stochastic volatility and interest rate models: how options are priced, hedged, traded and calibrated to the market.
- Professional Diploma in Algorithmic TradingThe top credential on the practitioner path. Four semesters, 41 courses and a 160-hour capstone covering everything between the mathematics and a book you could defend to a risk committee.
- Fellowship in Computational FinanceThe top credential on the researcher path. Four semesters, 38 courses, and a dissertation supervised in writing and examined by two faculty members.
Questions applicants ask
Why does bond pricing matter for quants who trade equities?
Every model discounts cash flows on a yield curve, every futures and options price depends on interest rates, and many systematic portfolios hold bonds. Interviewers for quant and risk roles ask about duration and the curve as often as about options.
What comes after this course?
Interest Rate Models, at researcher level, prices options on rates with short-rate and market models. Mortgage-Backed Securities and Credit Default Swaps apply the same curve to credit and prepayment.