Fixed income research is an important tool that helps in determining which financial product you should invest in to maximise profit. There are several analysts who follow some fixed set of steps to successfully conduct the research. This way you can invest in highly profitable investments with optimum risk to maximise your returns. Keep reading to have a comprehensive idea about fixed income analysis.
What is Fixed Income Research?
Fixed income analysis refers to the technique by which analysts determine the value of debt securities like bonds. They usually evaluate its risk profile which includes risk associated with debt repayment, macroeconomic conditions influencing its value, demand and supply of a bond and interest rate associated risk.
Moreover, it also helps to understand the fluctuation in the price of hedging portfolios. There are several fixed-income analysts who take such information into consideration for determining if it would be profitable to invest in such assets. There is a fixed technique by which analysts conduct fixed-income research.
How to Conduct Fixed Income Analysis?
Below are some steps that fixed-income analysts follow to evaluate the risk appetite and expected returns from debt securities.
Step 1: Evaluating Risk Associated With a Bond
The first and foremost step towards fixed income research is evaluating the risk associated with a type of fixed income. There is a direct relationship between risk and returns from a bond. This implies that if the risk is higher, the returns, too, will be enormous and vice versa. Hence, analysts first determine if the risk associated with the returns is justifiable.
Step 2: Determining Creditworthiness of a Company
The next step is determining if a company issuing this bond is creditworthy or not. This is because the risk associated with a fixed income source somewhat depends on a company’s credibility. Additionally, they also determine the industry to which the company belongs, its reputation there, duration of investment and returns that you can expect from it.
Step 3: Analysing Payment Frequency of a Bond
In this step, the researchers analyse when you can expect payments from your fixed-income investments. There are several types that offer period payments to investors. This is beneficial because it reduces the risk since you will not have to wait till the maturity of a bond to receive the entire sum.
Step 4: Studying the Features of Different Fixed Income Types
In the last step, the analysts evaluate the features of these bonds to find out if they would benefit the investor. Some of the bonds are callable, which implies that the issuer can pay them off before their maturity date. On the contrary, there are some bonds that can be converted to common stocks to maximise profits.
What is the Importance of Fixed Income Analysis?
The importance of fixed income analysis is as follows.
- Evaluate the risk associated: Fixed income research unravels the risks associated with debt securities where you are investing. This is essential as you have an opportunity to invest according to your risk appetite.
- Determine the value of the bond: This analysis helps in determining the right value of a bond. Accordingly, you can choose to invest in these bonds if you find them profitable.
- Identify attractive investment opportunities: An analyst can easily determine attractive features associated with different types of debt securities. Accordingly, you can identify some profitable investment opportunities.
- Compare investment characteristics: You can get the scope of comparing different debt securities types. There is also the option of comparison among stocks, real estate, derivatives, and others using this technique.
What are the Elements of Fixed Income Analysis?
The elements of fixed income analysis are as follows.
- Credit Analysis: This usually includes analysis of the financial statements of a company and collateral and covenants available. Besides this, the capacity of payment and assessment of the creditworthiness of the company are also included in it.
- Fixed-Income Valuation: There is a time-value-based formula and methodology that the analysts use to determine the value of fixed-income securities. The principal and the interest payments are taken into consideration to calculate the present value of a bond.
- Risk Analysis: This usually includes factors like credit or default risk, interest rate risk, inflation risk, sovereign risk, and foreign exchange risk associated with fluctuation in the returns from debt securities.
- Comparison with Government Debt Securities: It includes a comparison with government debt security bonds to determine which investment would be of lower risk and higher profit.
On having a complete idea about fixed income research, you can make an informed approach to integrate it while deciding about selecting the right debt security. However, you should select only a credible and experienced analyst to ensure guaranteed profits from your investments.