Fixed income analysis


Fixed income analysis

Fixed income analysis is the valuation of fixed income or debt securities, and the analysis of their interest rate risk, credit risk, and likely price behavior in hedging portfolios. The analyst might conclude to buy, sell, hold, hedge or stay out of the particular security.

Fixed income products are generally bonds issued by various government treasuries, companies or international organisations. Bond holders are usually entitled to get coupon payments at periodic intervals until maturity. These coupon payments are generally fixed amounts (quoted as percentage of the bond's face value) or the coupons could float in relation to LIBOR or another reference rate.

Valuation

The cash flow of a fixed income product generally consists of several coupon payments over the period of the bond's life, and repayment of the at the time of maturity. Since these cash flows occur at several times in the future, the "Time Value of Money" approach is used to find the "Present Value" of each cash flow. The sum of all the present values of the bonds cash inflows of the bond is its theoretical value.

Following are the typical questions an analyst finds answers for:
* Does the real interest rate built into the yield make sense?
* Is the real interest rate in line with the expected GDP growth rate (in case of treasury bonds) or earnings growth rate (in case of corporate bonds)?
* What is the expectation of GDP growth ? Where do we stand in the economy cycle?
* Where do we stand in the business cycle of the particular company?
* Is there any change expected in the basic real interest rate in the near future?
* Do the prevailing situations of monetary and economic conditions force any monetary easing or tightening conditions so that the base real rate will get changed?
* Is the inflation condition worsening or improving?
* Are the financial authorities in the country are pro-acting or re-acting to the forces of inflation and economic conditions?
* Is the risk premium built into the yield enough to compensate for the risks?
* What are the likely risks the market has currently priced into the premium and what are the new or hidden risks the market has overlooked and to what extent?
* What is the nature and volume of demand for a particular bond?
* What is nature and volume of supply for a particular bond?

The demand for fixed income products comes from banks, insurance companies, pension fund companies, endowment organisations, External Government Treasuries, individual investors like retirees and widows who need regular fixed cash in-flow.

The Fixed Income Analyst covers the term structure or yield curve analysis too. This is in simple terms, analysing all bonds issued by the same entity for different maturities (like US Govt 2yr bond, 10yr bond, 20 year bond). Such analysis enables one to understand the pricing differences between maturities comparable inter-market bonds (like Eur 2yr, 5yr and 10yr bunds)

The approaches for analysing fixed income products are broadly as follows: Fundamental approach; Technical Approach; relative value Approach.

Further reading

* Dr Andrew Colin [http://eu.wiley.com/WileyCDA/WileyTitle/productCd-0470011750.html "Fixed Income Attribution"] (London, Wiley & Sons. January 2005) ISBN 978 0 470 01175 1

ee also

*Bond convexity
*Bond duration
*Bond options
*Callable bonds
*Credit risk
*Discount rate
*Floating rate
*Hedging
*Interest
*Interest rate risk
*Mortgage
*Preferred stock
*Prepayment risk
*Swaps
*Yield curve


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Fixed income attribution — refers to the process of measuring returns generated by various sources of risk in a fixed income portfolio, particularly when multiple sources of return are active at the same time. For example, the risks affecting the return of a bond portfolio …   Wikipedia

  • Fixed-income attribution — refers to the process of measuring returns generated by various sources of risk in a fixed income portfolio, particularly when multiple sources of return are active at the same time. For example, the risks affecting the return of a bond portfolio …   Wikipedia

  • Income trust — An income trust is an investment trust that holds income producing assets. The term also designates a legal entity, capital structure and ownership vehicle for certain assets or businesses. Its shares or trust units are traded on securities… …   Wikipedia

  • Fixed cost — Fixed costs are business expenses that are not dependent on the level of production or sales. They tend to be time related, such as salaries or rents being paid per month . This is in contrast to Variable costs, which are volume related (and are… …   Wikipedia

  • Income statement — Accountancy Key concepts Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow management · Chart of accounts  …   Wikipedia

  • Income tax — Public financeAn income tax is a tax levied on the financial income of persons, corporations, or other legal entities. Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or… …   Wikipedia

  • Applied Security Analysis Program — The Applied Security Analysis Program (ASAP) is an investment program at the University of Wisconsin Madison School of Business. It was founded in 1970 by Professor Stephen L. Hawk and has been managed by Professor Mark Fedenia since 1986.… …   Wikipedia

  • Foundations of Economic Analysis — is a book by Paul A. Samuelson published in 1947 (Enlarged ed., 1983). It sought to demonstrate a common mathematical structure underlying multiple branches of economics from two basic principles: optimizing behavior of agents and stability of… …   Wikipedia

  • Credit analysis — is the method by which one calculates the creditworthiness of a business or organization. The audited financial statements of a large company might be analyzed when it issues or has issued bonds. Or, a bank may analyze the financial statements of …   Wikipedia

  • Technical analysis — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond …   Wikipedia


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.