Fixed Income Analysis
Curios if anyone here works at a fixed income shop or knows of any good resources for fundamental / bottoms-up fixed income security analysis? There are tons of resources on this website and on the web about equity analysis, but its hard to come by any information on how to fundamentally value a fixed income security or identify mis-valued FI securities. Fixed income market is far bigger that equities are more actively traded, but seem like focus at university and IB is only on equity analysis. Anyone here care to share their process for valuing a fixed income security or any good websites / books to check out? I read through Henderson's book, but it was mostly around trading strategies to capitalize views on steepening of curve, increased volatility, etc.
Curious how you would go about valuing a fixed income security if you were given a 10K, investor presentation, recent sellside research, etc
I’d check out fabozzi if you’re interested or trying to learn more about a specific product, but as far as valuing them goes, bonds are generally trading based on relative value so there really isn’t a proper way to ‘value’ the bonds since most trade according to comps and credit metrics
Read "Fundamentals of corporate credit analysis" by S&P. It gives you a good overview of how the ratings agencies rate companies. As the above poster said, credit is a relative value asset class so what you are trying to do is determine the appropriate spread (additional yield over the Treasury yield) necessary to compensate you for the underlying risk of the issuer. For example, if you have 2 companies operating in the same industry and they have similar ratings (say both BBB rated), their bonds of the same tenor and currency should trade with similar spreads. If company A's 10 year bond trades at 200 bps (2%) over the US 10-year government bond and company B's 10 year bond trades at 300 bps (3%) over the US 10-year government bond, you may have a 100 bps mispricing. Of course, no two companies are the same so that 1% spread differential may be warranted.
Just project out a bonds coupons and principal repayment, and discount it back using the prevailing yields in the market. If the bond looks a lot riskier, slap on a probability to each cash flow and weight it accordingly.
Or better yet, buy any bond you see and pray the Fed shows up at your door the next time there's an economic crisis.
Terrible advice
I wholeheartedly agree.
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