What should you read to learn more about fixed income markets?

Akash (I hope I got the spelling right, my apologies if I didn’t!) writes in to ask what he should read to learn more about fixed income markets. As he puts it, everything from basic to intermediate!

That might make for a long (and by definition) and somewhat less than comprehensive list, but the good news about a blog post is that it can always be edited! If anybody has additional links, send them along, and we’ll keep updating this post.

In terms of a very simple introduction to the topic, begin here. Very basic, very introductory, and therefore a good place to start. Wikipedia is a modern miracle, and an invaluable gift.


So, what very basic text should you begin with if you want to start learning about fixed income securities? More advanced folks might turn up their noses, but I think there is still something to be said for Investment Analysis and Portfolio Management, by Prasanna Chandra. Never trust my memory, but I think the fourth section deals with fixed income securities in India. If you are an absolute novice, begin there.

Ajay Shah and Susan Thomas have a book that is a very good introduction to financial markets in India in particular, and the book has two separate chapters on fixed income securities in India, one being devoted to the government securities market, and the other to the corporate bond market. Perhaps a little out of date now, but still worth a read.

I’ve not enrolled in, or finished either of the two courses on Coursera I am about to recommend right now. Nor is there any particular reason to recommend courses from Coursera alone. There are plenty of other online courses available. But I tried to put myself in the shoes of somebody who is just beginning their journey in this field, and selected courses from the Coursera website keeping this in mind. That led to the two courses below:

  1. Bonds and Stocks, by Gautam Kaul at the University of Michigan
  2. Introduction to Financial Markets, by Vaidya Nathan, at ISB.

As I mentioned, there is no reason to limit yourself to just Coursera, or just these courses. But these seem to be decent introductions. Here are two links to the syllabi of courses taught at the NYU Stern School of Business that deal with our topic:

  1. Debt Instruments and Markets, by Bruce Tuckman
  2. Debt Instruments and Markets, by Ian Giddy.

A useful thing to do is to go through the course outline, get yourself a copy of the textbooks they recommend, and try and read through the recommended course structure on your own. If you will allow me to be a bit heretical, might I suggest not worrying too much about not following everything all at once? Just read through it haphazardly, all higgedly-piggedly, and keep coming back every now and then to topics that seemed particularly abstruse. By the way, speaking of every now and then, have you considered spaced learning?


 

As a thumb rule, if you are interested in finance, always read everything written by Aswath Damodaran. Visit his homepage, click open whatever links grab your fancy, and read. I am not joking. Here are some blogposts to get you started:

  1. Dividend Yield and the T-Bond Rate.
  2. His favorite novels on financial markets.

All that besides, watch his videos, read his books, read his papers – be a greedy, greedy pig when it comes to devouring stuff written by him. My personal favorites are his attempts to value Uber and Tesla, but it is a long, long, long list.

 


 

Another useful resource is Ajay Shah’s blog. Again, some links to get you started:

  1. Difficult questions about the bond market.
  2. A presentation about developing the corporate bond market in India.
  3. A presentation about the bond-currency-derivative nexus.

I hope this helps, Akash – thank you for asking the question.

 

 

Signaling, Bundling And College

What is bundling? It’s selling more than one thing for a single price. When you buy a cup of coffee, you’re buying a cup of coffee.

But when you’re buying a cup of coffee at Starbucks, are you just paying for the coffee, or are you paying also for the air-conditioning, the Wi-Fi, the chairs and the overall ambiance? In fact, for quite a few folks who choose to work out of Starbucks, the coffee might end up being the least important of the things they’re paying for. That’s bundling.

Here’s an MRU video about the topic:

 


 

What’s signaling?

This thought experiment is borrowed from Bryan Caplan, author of the book The Case Against Education:

Take your pick: a world class education while you were/are in college, from the very best in the world in your chosen field. You get to pick your dream educators, your dream college, you get access to absolutely world class faculty, libraries, whatever. The works. But: no degree. You will never be able to show or prove your credentials to anybody. World class learning, but no proof that it took place.

OR

A certificate from whichever college and course you pick in the world. Harvard PhD? Here you go. B.Tech from the IIT of your choice? Check. But: no learning. You will never be able to attend classes and learn in that college. You’ll get the degree, but sans learning.

If you chose the latter option (I would and I do), you know what signaling is.

Here’s Wikipedia:

In contract theory, signalling (or signaling; see spelling differences) is the idea that one party (termed the agent) credibly conveys some information about itself to another party (the principal). Although signalling theory was initially developed by Michael Spence based on observed knowledge gaps between organisations and prospective employees, its intuitive nature led it to be adapted to many other domains, such as Human Resource Management, business, and financial markets.

In Michael Spence’s job-market signaling model, (potential) employees send a signal about their ability level to the employer by acquiring education credentials. The informational value of the credential comes from the fact that the employer believes the credential is positively correlated with having the greater ability and difficulty for low ability employees to obtain. Thus the credential enables the employer to reliably distinguish low ability workers from high ability workers.


 

There’s many variants of the Caplan question that are possible. For example, would you prefer to wear an original Nike T-shirt without the logo, or a fake Nike T-shirt with the logo?

If I may be permitted to veer into slightly dark territory: would you prefer to be in a happy relationship, or show that your relationship is happy?

We are, all of us, signaling all the time. Modern society wouldn’t be possible without signaling, because the cost of communicating in a world without signaling would be too high.

But education? It doth signal too much, methinks.


 

Let’s go back to bundling, and think about education. What are you buying when you enroll in a college?

If you are an optimistic sort of person (more cynical folks would call you naive), you might say you’re buying an education. If Michael Spence has made an impression on you, you might say that you’re buying the credential.

By the way, if you’ve ever asked the following question in a classroom – or even been tempted to – you’re buying the credential, not the education:

“Is this a part of the syllabus?”

And I’ve yet to meet a student (to be clear, myself included) who hasn’t asked that question.

But hey, it’s Econ101. If you’ve asked the question, you are minimizing learning. You are learning, but only to get on the path to maximize marks. Marks, I would argue, are more about credentials than they are about learning.

You’ve chosen, through your actions, signaling over learning.


 


 

The LinkedIn, Starbucks and Coursera Problem

 

  1. What is LinkedIn’s business? It’s a professional network, and as an economist, I’d argue that one of the things that it does is that it reduces the asymmetry of information. When LinkedIn allows you to “endorse” a person for a particular skill, or it allows you to post results of a test it has enabled you to take, it is allowing you to signal that you are good.
    To whom are you sending this signal? To anybody who views your profile on LinkedIn! LinkedIn is like a degree certificate from your college: you’re signaling that you know.
  2. What is Coursera’s business? It is an online service that gives you access to recorded lectures that you can listen/see on your own time. These lectures are recorded by world-class faculty, so the learning is as good as it can get. Coursera is like a classroom (but arguably a much better one) from your college: you’re learning.
  3. What is Starbuck’s business? Selling coffee? Sure, you could argue that, but it’s more than that. Remember, you’re buying a bundle at Starbucks! Starbucks’ business is providing an environment that allows people to work in a social setting. To work, to network, to relax, to converse – but what it sells you is comfortable environs where you can do what you want to. Starbucks is like the setting in the college but outside the classroom: it’s your peer environment where you can get work done.

 

Now, the problem of education: when you buy a degree from college, you’re getting all three things.

College is a bundle: education | credentialing | peer networks

 


 

LinkedIn Starbucks Coursera
All logos belong to the firm in question

 

And the reason colleges haven’t gone away yet – and won’t, anytime soon – is because there is no business that I am aware of that sits at the center of that triangle as comfortably as college does.

 


 

Nowadays, it is almost platitudinous to say that the educational system is broken. Why, Peter Thiel cites it as an example of thinking that is not contrarian in his book, From Zero to One.

But here’s the thing:

College isn’t broken.

A Coursera course isn’t enough to land you a job these days: fact.

Most of us value, and almost always will value, the friends we make in college: fact.

The college still is the best place to go to to get both of these things together at the most reasonable price.

But:

Learning is broken in colleges today: fact.

 


If you want to go up against college as a business, you need to sell the same thing that college is selling. And the college sells you a bundle.

A business that seeks to do better than college must do better on all three counts, not just on learning. All of the online learning businesses – Coursera is just one very good example – aren’t able to fill all of the three vertices just yet.

And that’s why education hasn’t been truly shaken down by the internet just yet:

Because college today is more about signaling than it is about learning, and because when you pay money to a college, you are getting a bundle.

So what to do? How to solve this problem?

In the next post in this series, we’ll see what other folks who’ve chosen to battle this beast are trying to achieve.