George G. Kaufman
GSB FINANCE 454: BOND MANAGEMENT
The course provides students with a fundamental understanding of the operation of bonds
and the bond market. The course discusses theories explaining the level of interest rates at
any time and why interest rates differ on different types of bonds. The mathematics of bond
pricing are explored in some detail and particular attention is given to the development and
use of duration, both as a measure of interest rate risk and as a tool for developing bond
portfolio strategies. Important bond characteristics, including term to maturity or to
repricing, risk of default, tax treatment marketability, embedded options such as put, call
and convertibility, and covenants are described and the implications of each for the pricing
of bonds are analyzed. Alternative bond portfolio strategies are examined. The course also
analyzes the institutions operating in the bond market and the importance of innovations in
debt securities. The students participate in a U.S. Treasury bill bidding game, in which they
submit bids on a series of actual weekly Treasury bill auctions. Their performance in this
game is evaluated on the basis of the actual results of the auction.
One or two textbooks, a readings packet with important supplementary articles from other
publications, and handouts; some readings on library reserve.
What the Student "Takes-Away" from the
A knowledge of what determines the level of interest rates.
An understanding of why interest rates differ on different types of debt instruments.
The pricing of debt instruments.
The importance of characteristics of debt instruments, such as term to maturity,
Credit risk, and tax treatment, for the pricing of securities.
The reasons embedded options are included in some debt securities and how they are
The concept of duration and how it is used in measuring interest rate risk and in
determining bond portfolio strategies.
An introduction to interest rate forecasting.
Skills in participating in Treasury bill auctions.
Life from a bond portfolio manager's viewpoint.
Lectures and class discussion.
A mid-term and a final examination are given.
Homework problems and participation in the Treasury bill bidding game.
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