May 15, 2018
Fixed income products are bonds issued by companies, Government treasuries, or organizations. Bondholders are entitled to periodic coupon payments on these bonds until maturity. This coupon amount is fixed as a percentage of the bond’s face value or can float as well. Analyzing the trend that a particular bond shows with respect to the future, and as an investment, comprises of the fixed income analysis.
Fixed income analysis means the process of valuation of debt securities or fixed income securities along with an analysis of the risk associated with these securities. Fixed income analysis is generally done to help a person decide whether to sell, hold, buy, or hedge certain securities.
In this article, we will take a look at ways to perform a fixed income analysis by three methods –
Fixed income analysis using Yield curve construction
A yield curve is a line that plots the interest rates of bonds having the same credit quality but different maturity dates, at a definite point in time. The shape of the yield curve determines any changes in the economic activity or interest rates at a time in the future. There are three shapes of a yield curve – flat, normal, inverted – which signify a particular type of economic activity.
Let’s take a look at how to do a fixed income analysis depending on the shape of a yield curve.
Fixed income analysis using Trading Strategies
Fixed income analysis using Risk analysis
When it comes to analyzing risks, a lot of factors come into play. These determine whether you will get the desired returns on your bonds or not. It is also used to decide whether to purchase/sell/hold a bond. The following are some risks that need to be analyzed –