Bond Pricing, Yield Curves and Mortgage-Backed Securities

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.

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.

Why is prepayment the central problem?

Mortgage-backed securities turn home loans into bonds. The US agency market alone is worth trillions of dollars and trades daily, and private-label mortgage bonds were at the center of the 2008 crisis. This course explains how the securities are built, why their cash flows are uncertain, and how desks value and hedge them.

A homeowner can repay the loan at any time, and usually does so when rates fall and refinancing is cheap. That leaves the investor holding cash just when reinvestment rates are low, and holding a longer bond just when rates have risen. Modeling that behavior, and pricing the option it creates, is the core skill the course teaches.

Who is this course for?

Quants, risk analysts and systematic investors who need fixed income.

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.
• Project the cash flows of a mortgage pool under different prepayment speeds.

Syllabus, module by module

1. Price and yield

   Discounting, coupons, accrued interest, day counts and yield to maturity.

2. Duration and convexity

   Sensitivity to rates, the second-order correction and key-rate durations.

3. Building the curve

   Bootstrapping zero and forward rates from bills, bonds and swaps.

4. Fitting the curve

   Nelson-Siegel and spline fits, and spotting cheap and rich bonds.

5. The mortgage and the pool

   Amortization, servicing, agency guarantees and the pass-through security.

6. Prepayment

   CPR, PSA, refinancing incentives, burnout and turnover.

What every course contains

Every paid course comes with the first seven and the certificate, whichever level it sits at. The proctored exam and the credential come when the course is taken as part of a Certificate, Diploma or Fellowship. Everything is self-paced: the material is yours to study in any order, at any hour, for the whole of the license.

1. Workbooks. Written to train the thinking patterns and the important concepts of the course, with worked problems and the reasoning behind each answer, so that you learn to think the way the subject is thought.
2. Audio edition. Focused, well-presented recordings with explainers and examples of the material, made to be interesting, relevant and entertaining, so that the general subject can be learned away from the desk.
3. Notes. Pre-produced notes with every fact the course relies on, written out in full, so that nothing has to be transcribed from the films or the audio.
4. Cheat sheet. One sheet with every important learning concept of the course on it, to keep beside you during the work and to revise from before the exam.
5. Named sources. Every fact in the notes names its source, the paper, the book or the dataset, for anyone who wants to dig in further.
6. Explainer films. Focused films, in the style of the sample films on the catalog page, that walk through the most difficult concepts of the course with visual explanations of a high standard.
7. Transcript. A full transcript of every film and every audio recording, searchable and quotable.
8. Proctored exam. Taken as part of a Certificate, Diploma or Fellowship, the course ends in a proctored multiple-choice questionnaire, with a pass mark of 60% and three retakes included. A course taken on its own is assessed by its coursework and has no exam.
9. Verifiable certificate. A certificate of completion that a third party can verify: an employer sends the code on it to the credentials office and receives written confirmation of the course, the date and the result.
10. Credential of the program. The Certificate, Diploma or Fellowship of the program, track or path the course belongs to, awarded when every course in it is passed. Which one depends on the program you choose.

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, Yield Curves and Mortgage-Backed Securities, issued by the Institute with a verification code. A course taken as part of a Certificate, Diploma or Fellowship ends in a proctored online exam with a pass mark of 60%. The fee includes three retakes; each attempt after that carries a reduced proctored exam fee. A course taken on its own is assessed by its coursework and has no exam. Read how certification works.

Before you start

The instruments and conventions of Financial Markets and Instruments, and the mathematics of the foundation courses.

• Financial Markets and Instruments
• Mathematics for Quantitative Finance: Calculus and Linear Algebra