Finance 2227 -- Fixed Income Markets

Dr. David Nawrocki


Villanova School of Business

Department of Finance


Fall 2019 - Finance 230-2227 - Financial Markets

Office: 2020 Bartley next to the Finance Office

Office Hours: By appt.: TTh 12:00pm-1:00pm by appointment

Phone: 610-519-4323

E-mail: (emails will typically be answered the same day, seven days a week)


Prerequisites: FMR class and Junior Level Standing.  "It is the student’s responsibility to be certain that the prerequisites have been successfully completed. If at any time during the semester it is determined that a student has not completed the prerequisites, the student can be administratively dropped from the course without credit or tuition refund."

Course Objectives:

To provide the student with an overview and understanding of the role of financial markets and financial institutions in the flow of funds in our domestic economy.  The course provides coverage in all segments of the fixed income markets including how interest rates are determined and the relation between rates in different markets.  The course should provide a strong sense of relevance of these topics to the student’s future professional and personal life.  Ethics in these markets is a key focus of the class and will underlie all of the other objectives in the class.  Memorization of material is strongly discouraged and will result in reduced grades.

Required Textbooks:

1.  Course Pack (at the book store) containing:

Tvede, L., Business Cycles: From John Law to Chaos Theory, 1997.
Boulding, K. Evolutionary Economics, 1980.
Katz and Kahn, Social Psychology of Organizations, 1966, Chapter 2.

2. Frank Fabozzi, Bond Markets, Analysis and Strategies, 8/e Prentice Hall, 2013.

3. Ben Bernanke, The Federal Reserve and the Financial Crisis, 2013.

Optional Enrichment

Timothy Geithner, Stress Test: Reflections on Financial Crises, 2014.

Michael Lewis, Flash Boys: A Wall Street Revolt, New York: W.W. Norton, 2014.

Michael Lewis, The Big Short: Inside the Doomsday Machine, 2011.




1. Overview of Money - a Credit Instrument - Lecture Notes and Tvede Chapters 1-5

2. Basic Bond Pricing and Yield – PV and PV annuity – Fabozzi Chapters 2 and 3

3. Credit Markets – we will be moving quickly.

·         Treasuries – Fabozzi Chapter 6

·         Corporate Debt – Fabozzi Chapter 7

·         Municipal Bonds - Fabozzi Chapter 8

·         Residential Mortgages - Fabozzi Chapter 10

·         Mortgage Pass-Through Securities - Fabozzi Chapter 11

·         Collateralized Mortgage Obligations (CMOs) Fabozzi Chapter 12

·         Collateralized Debt Obligations (CDOs) - Fabozzi Chapter 16

3. General Systems Theory - Katz and Kahn - Chapter 2

4. National Flow of Funds - Based on Katz and Kahn Chapter 2 and Flow of Funds article

5. Financial Market Theory: Walras and Pareto - Lecture Notes and Handout

6. Term Structure of Interest Rates - Fabozzi Chapter 5

7. Bond Price Volatility – Duration and Convexity - Fabozzi Chapter 4

8. Active Bond Management Strategies - Fabozzi Chapter 23

9. Liability Funding Strategies - Fabozzi Chapter 25

10. Interest Rate Swaps - Fabozzi Chapter 29



30 Points Each - 2 Midterm Essay Exams

40 Points for Final Essay Exam.  First midterm before fall break.  Second midterm before Thanksgiving break.  Final during finals week.

Method of Instruction:  Lecture, Outside Reading, Class Discussion and Writing Essays.


There will be NO makeup exams. Missed exams will be made up by writing a term paper which may affect your final grade depending on the average of the exams that you do complete.  A valid excuse will be required for any absences from an exam.  You can only miss one midterm exam.  The final exam is given only during the assigned final exam period. DO NOT ask to take the exam early.  There is no makeup term paper for the final exam.

Other Issues

I will not tolerate any disruption of class by beeping computers or ringing cell phones.  Surfing the internet is to be on your own time not classroom time.  You do not need my permission to visit the facilities.  Please be as quiet as possible when exiting and entering the room. 

Honesty Statement

Honesty during exams is imperative. The instructor reserves the right to make ANY   adjustments necessary in order to maintain the fairness of the exams and the course grading. Graduating seniors should note that graduation and diplomas may be withheld because of dishonesty in this course. Accounting seniors should note that this course may be used as a required course in order to sit for the C.P.A. exam in New Jersey and New York. A grade of C or above may be required in order to sit for this exam.

The Code of Academic Integrity of Villanova University addresses cheating, fabrication of submitted work, plagiarism, handing in work completed for another course without the instructor’s approval, and other forms of dishonesty. For the first offense, a student who violates the Code of Villanova University will receive 0 points for the assignment. The violation will be reported by the instructor to the Dean’s office and recorded in the student’s file. In addition, the student will be expected to complete an education program. For the second offense, the student will be dismissed from the University and the reason noted on the student’s official transcript.

Disability Statement

It is the policy of Villanova to make reasonable academic accommodations for qualified individuals with disabilities. If you are a person with a disability please contact me after class or during office hours and make arrangements to register with the Learning Support Office by contacting 610-519-5636 or at as soon as possible.  Registration with the Learning Support Office is required in order to receive accommodations.  If you have a disability that may affect your success in this course and wish to discuss academic accommodations, please arrange to meet with me as soon as possible and not later than the end of the second week of the semester.  The major reason that this course will stress a student with learning disabilities is that the essay exams are time-constrained.   With most disabilities, I can simply allow you additional time during the exam.   The Learning Support Office will usually provide me with an indication as to how much additional time I should allow.  If you require additional time, you will have to take the exam with the 4pm class. 

                                                                                                                         Ideaological Differences 

In this period of ideological differences, some students may object to the concept of credit money systems and the role of the Federal Reserve.  I've been teaching this material from textbooks for over 40 years.  The purpose of this class is to cover the actual financial market system which you may be joining for your career.  Your opinions of the financial market place are irrelevant when the purpose of the course is to cover the working system.  It is also important that any views expressed on your essay midterms can be supported with empirical data or with classroom materials.  On April 1st, in response to a Wall Street Journal opinion piece written by two Villanova faculty member, Father President Donahue expressed Villanova's classroom policy as follows:

"Our commitment to fostering a sense of belonging and inclusion for all students in no way means that we are rejecting or silencing certain viewpoints, nor does it mean we are downplaying our Catholic identity and values. As an academic institution, we want and encourage our faculty to challenge their students. We also believe it is important for faculty to teach and examine a wide variety of subjects, perspectives and viewpoints—some that students may agree with and others they may not."


I hope you will abide by this policy and we will have a great semester learning one of the key institutional foundations of our civilization.

The first two weeks we will be talking about

Barter Exchanges
    Lack of Double Coincidence of Wants
Roles of Money

    1. Medium of Exchange
    2. Store of Value
    3. Unit of Value
    4. Standard for Contracts

Types of Money

I. Full Bodied Money
II. Representative Full Bodied Money
III. Credit Money
     A. Issued by Banks
        1. Checkable Deposits
        2. Commercial Bank Notes
        3. Central Bank Notes
     B. Issued by Governments
        1. Token Coins
        2. Representative Token Coins
        3. Notes

The Federal Reserve Bank of San Francisco has a great history of paper money
in the United States at the hyperlink below: