Year 3 · Applied Finance · Advanced Fixed Income
Advanced Fixed Income
Move from basic bond math to professional fixed-income analysis: curve construction, forward rates, key-rate risk, spread measures, credit curves, optionality, securitized products, inflation markets and portfolio positioning.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Build and interpret spot, par and forward curves.
02
Measure interest-rate exposure with DV01, modified duration and key-rate duration.
03
Distinguish nominal spread, Z-spread, asset-swap spread and option-adjusted spread.
04
Understand how default probability and recovery affect credit pricing.
05
Analyze callable bonds and mortgage-backed securities through embedded optionality.
06
Interpret inflation-linked bonds and breakeven inflation.
07
Construct fixed-income portfolio trades using curve, spread and relative-value views.
CONCEPT MAPFrom yield curve to portfolio trade
Par yields are quoted by the market, but spot rates price the cash flows
CORE FACTS · SAME IN EVERY MODE
A par curve shows coupon rates that make bonds trade at par for each maturity.
A spot curve contains zero-coupon discount rates for individual future cash flows.
Bootstrapping extracts spot rates sequentially from observable market instruments.
Forward rates are implied by today’s term structure rather than direct forecasts of future policy.
BeginnerTeaching style changes, knowledge does not.
A coupon bond pays cash on several dates, so one single yield hides the fact that each payment happens at a different maturity. Spot rates let us discount each cash flow at the rate appropriate for its date.
FORMULAForward rate from spot rates
(1 + z₂)² = (1 + z₁) × (1 + f₁,₂)The one-year forward rate beginning in one year is implied by the one- and two-year spot rates.
PROFESSIONAL VOCABULARYSpot rate / spot rate Bootstrapping / bootstrapping Forward rate / forward rate
Zero-coupon rate for a single maturity.
Sequential process used to derive zero-coupon discount factors from market instruments.
Future borrowing or investment rate implied by today’s term structure.