**What is the Financial System? Why does it exist?****Key Players in the Financial System****Specialization within the financial system****Principles of pricing financial instruments****Is the Market Efficient?**- Efficient Market Hypothesis
- Counterclaims to Market Efficiency
**References**

**Major types of instruments**- Bonds (Fixed Income)
- Loans
- Stocks (Equities)
- Hybrid Instruments
- Derivatives/ Synthetic Instruments
**Major asset classes**- Fixed Income
- Equities
- Commodities
- Currencies
- Emerging Markets
**Links between different markets**

**Structure of a Bulge Bracket Sell-side Firm**- Investment Banking Division
- Capital Markets
- Prime Brokerage
- Support Functions
**Basic Market Microstructure**- How do instruments trade?
- Exchange-Traded Markets
- Over-the-Counter (OTC) Markets
- Trade Date and Settlement Date
**Further thoughts**

**What do buy-side firms do?****Investment Styles****Investment Product Offerings**- Mutual Funds
- Exchange Traded Funds (ETFs)
- Alternative Investments
- Liquid Alts
- Separately Managed Accounts
- High-Frequency Algorithmic Trading Products
- Sell-side Index Swaps
**Capital Owners**- Retail Investors
- Institutional allocators
**Intermediation – Consultants, OCIO, Fund of Funds**- Process of picking an institutional manager
**Working at a buy-side firm**

**Indices – What are they? Why do we need them?**- Criteria for a Good Index
- Examples of Popular Indices
**Efficiency of index investing****Benchmark Indices vs Strategy Indices****Index Mechanics and Terminology****Measuring Risk – Risk Models**- Risk definition
- Risk factors – Factor-based Risk Models
- Risk Measures
- Role of Risk Models in Portfolio Construction
**Performance Evaluation**- Performance Evaluation Measures
- Performance Attribution
**Portfolio Management Summary**

**Market Microstructure****FinTech**- Big Data in Investment Management
- Crowdfunding
- Marketplace Lending
- Robo-advisors
- Quantitative Trading
- Factor-based investing
- Blockchaining
- Payment Mechanisms and Cryptocurrencies
**Central Bank Policy****Regulation**- Compliance Software
**References**

**Treasuries – The Basic Idea****What is a bond?****Our first example – a simple bond and its yield****Treasury quoting convention****U.S. Treasury Auction Mechanics**- When–issued Market
**Financing Treasury Purchases – the Repo Market****Microstructure of the US Treasury Market****The Simple Example Re-visited – SPOT CURVE AND ACCRUED INTEREST**- Different discount rates for different payment dates – the spot curve
- Bootstrapping – from bond prices/ yields to spot rates
- Bond prices on non–coupon payment dates – Accrued Interest
**Forward curves****Expected patterns in bond price movements**- Pull to par
- Rolling down the yield curve
**Summary**

**Reviewing Bond Price–Yield Relationship**- Price–yield graph
**Choosing between bonds****Quantifying Interest Rate Risk in Treasuries**- Duration
- DV01
- Interest Rate Risk of Portfolios of Treasury bonds
**Hedging Interest rate risk – applications of duration**- Immunization
- Yield curve movements – parallel versus non-parallel movements
**Convexity****Further comments**

**Why do yields / interest rates move?**- Central Bank Policy
- Business Cycle
- Economic Variables and News Releases
- Inflation Expectations
**Term Structure of Interest Rates – Theories of the Shapes of yield curve****Investing in Treasury Markets – Expressing views using Treasuries**- Leverage
- Carry Trades
- Steepeners and Flatteners
- Relative Value Trades
**Other Interest Rate sensitive instruments**- Treasury Futures
- TIPS (Treasury Inflation Protected Securities)
- LIBOR-based instruments
- EuroDollar Futures
- Interest Rate Swaps
- ETFs related to Treasury Markets
- Options on the above securities
- Conclusion

**US Mortgages**- Prepayments
- The TBA Market
- Valuing MBS
- Mortgage Market Liquidity
**Municipal Bonds**- Municipal Bond Classifications
- High-Yield Munis
- Primary and Secondary Muni Markets
**Corporate Credit**- Capital Structure
- Bankruptcy
- Quantifying Default Risk
- Credit Rating Agencies
- Important Elements of Credit Analysis
- Credit Instruments
- Market Dynamics and Liquidity
- Credit Analytics
- Quantitative Credit
- Investing in Credit
**Securitization**- Securitization Overview and Motivations
- Why does Securitization Work?
- Different Types of Securitization Structures
**References**

**What is equity?****Equities and the Capital Structure – Role of Leverage for a CORPORATION****Capital structure theories – Tax benefit of Debt****Corporate Governance****Valuing Equities**- Setting the Stage
- Equity Valuation Models
**Equity Valuation in Real Life**- Role of Macro Analysis in Equity Valuation
- Fundamental versus Quantitative Investing
- Value Investing
- Non–traditional data sources
- Role of Algorithms
- Thematic Investing
- Model Robustness
- Shorting Equities
**Equity Instruments**- Forwards
- Futures
**Equities as an asset class – microstructure of equities**- Current Status

**Expected Return and Risk of an Equity Stock****Investors’ risk–return tradeoffs – utility function and indifference curves****Diversification – the core IDEAS****Building on Diversification – Portfolio Theory and Efficient Frontiers**- Case 1: Optimal Portfolio with One Risky Asset and the Risk Free Asset
- Case 2: Optimal Portfolio with Multiple Risky Assets and One Risk–Free Asset
- When does adding a new security improve a portfolio’s risk characteristics?
**Capital Asset Pricing Model (CAPM)**- Assumptions of the CAPM
- Relevance of the CAPM
- Interpreting the CAPM
- Estimating Betas (and Alphas) in the CAPM
**Introduction to Factor Models**- Arbitrage Pricing Theory Overview
**Risk management in equity portfolios****Portfolio construction techniques**- Markovitz Mean-Variance Optimization
- Black–Litterman Model
- Risk Parity

**What is an option? Basic terminology****Some simple examples – call and put options****Options trading – Mechanics****Using options in trade construction**- Directional trades with Call and Put options
- Volatility Trades with Straddles and Strangles
- Covered call
- Protective Puts
- Call spread, Put spread, Calendar spread
**Put–call parity****Exotic Options**

**Modeling stock prices – a binomial model**- Call Option – Pricing mechanics
- Further details
- Multi-period models
- American Options
**Black Scholes formula**- Graph of Call Option Prices before Expiration – some more Greeks
- Implied Volatility and Realized Volatility
- Drawbacks of Black–Scholes – Modifications
- Relevance of the Imperfect Black Scholes Formula
**Volatility–based option trades**- VIX
**Summary**

**Return Concepts and Calculations**- Simple & Compound Returns
- Time Value of Money
- Net Present Value (NPV)
- Internal rate of Return (IRR)
**Introduction to Financial Statements – Concept of Capital Structure**- Balance Sheet
- Income Statement
- Cash Flow Statement
- Footnotes and Disclosures
- Using the Information in Financial Statements – Metrics, Forecasting, Ratio Analysis, Management Views
**Macroeconomics Primer**- Measuring Output (GDP) Growth
- Macroeconomic Theory and Models
- Currency Markets
- Practical Macroeconomic Considerations for Finance Professionals
- Major US Macroeconomic Data Series
**Basic Statistics and Data Analysis**- Summarizing Data
- Probability and Distributions
- Multivariate Analysis – Regressions
**Introduction to the Bloomberg Software/ Terminal**

- - New Edition available now
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**Garud N. Iyengar,*** Chair and Professor, Department of Industrial Engineering and Operations Research, Columbia University, New York*

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