Fixed income analysis refers to the valuation of debt securities or fixed income. It also means the analysis of the credit risk, interest rate risk and likely price behavior of the securities in the hedging portfolios. As an outcome of the fixed income analysis, the analyst decides whether to buy, sell, hedge or hold a particular security. The analysis also reveals whether to stay out of the particular security or not. After going through the fixed income analysis, the nature of the risk and other behavior of the securities can be judged profoundly.
The bonds issued by the corporations, companies, government treasuries and international organizations are actually the fixed income products. The corporation, governments and companies issue bonds in the capital market in order to raise money for their businesses or other development work. Investors go for these bonds and can invest in them by purchasing some of those bonds.
It is believed that investment in bonds is less risky at the same time offers fewer returns. In order to avoid the boiling nature of the capital market, a lot of investors prefer to invest in the bonds, which ensure a fixed return. The bond holders are entitled to get coupon payments at periodic intervals until the maturity of the bonds. These coupon payments are usually fixed amounts that are quoted as certain percentage of the face value of bond.
The cash flow of a fixed income product is comprised of the repayment of the bond’s principal value at the time of maturity and all the coupon payments made over the entire life period of the bond. Time Value of Money approach is applied in order to find out the Present Value of every cash flow, which occurs numerous times in the future. The theoretical value of a bond is then defined by summing all the present values of the cash inflows of the bond.
The fixed income analyst tries to give solutions for the following issues:
- Real interest rate
- Business cycle of the particular company
- Expected GDP growth rate
- Inflation condition of the market
- How the financial authorities are acting to the forces of inflation
- Hidden risks the market
- Nature and volume of supply for a particular bond
- Nature and volume of demand for a particular bond
Last Updated on : 1st July 2013