High Grade research?

1337:

A large part of this type of research is understanding the company and the industry in which it operates because a substantial loss of principal can occur if the company becomes obsolete or uncompetitive over the term of the loan. High grade research only resembles equities in that historic earnings and financial statement models are updated quarterly. Instead of focusing on EPS, price targets or catalysts, these investors focus on downside scenarios, cash flow, and financial policy. LBO risk is evaluated (the subject company doing an acquisition, usually) as well as divestitures. Valuation is based on relative value or spread over comparable Treasuries of bonds within the same industry with similar ratings/credit metrics. Watching credit strength and how ratings agencies work is important because some funds are not allowed to hold a company if they lose their HG rating, in addition to the performance hit taken if spreads widen.

1337, Thank you for your reply! Can you possibly share some insights about what to expect at an entry-level fixed-income research interview? and how LBO risk is considered?

1337:

It varies a bit from firm to firm -- have seen everything from complex technical questions to no technical questions at all. I think the most important thing would be that you really are interested in fixed income and are not there just to transition to equities or get to the sell-side. I think this is something that most FI groups look for, sometimes it is not apparent but it is likely on their minds. Besides that, they will want to know that you can do careful analysis and will not miss items that could come back to hurt the investment down the road. Remember, the downside potential for having a loss in a FI investment is usually far greater than the upside potential, especially for high-grade names. Capital preservation is key and your demeanor and pitch should show that you are careful and that looking for risks of losing money or the business failing is more important than looking for a high-growth business model. LBO risk is considered in that you should try and see if your company is at risk of doing an acquisition or if your company has the characteristics to be an LBO target.

I'm not sure what common practice is and whether or not you need to have a company pitch ready. You may want to ask before going in so you are not caught off-guard. Equity roles you almost always need one but this FI role might be different.

Thanks for the advice! What kind of technical questions should I prepare? I know that I need to know the answers to basic bond pricing questions, but do I expect to get quetions regarding, say, the Ho Lee model and the Gamma, Theta, Vegas..? (It's an entry-level research position. they only require bachelors degree)

Also, what would be a good way to demonstrate true interests in Fixed Income. The reason I like fixed incomes is because it's more closedly related to Macroeconomics..but Im not sure whether that's the best way to answer the "why fixed income" question..