Question

Hello,

Kindly I need short description of " Fixed Income Analysis?" .

Thank you!!

Answer 1

Fixed income analysis is analysis based on instruments which has fixed income or constant cash flows. The cash flows are based on contract and they are sensitive to changing interest rate scenarios. Investors make buy, sell or hold decision based on interest rate scenarios.

Fixed income securities issued by corporation, firms, entity, government bodies and central banks.

The bond interest rates are high to low based on issuer’s riskiness from high to low. Higher the risk higher the interest rate and vice-versa.

Valuation on instruments depends on the time value of money the instrument's cash flows are discounted with current interest rates related to category of bond. The price of the bond is inversely related to market interest rates.

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Few additional concept related to Bond:

Bond price and interest rates are inversely related. Interest rates are discounting factors which are used to discount a bond cash flows over the period. The bonds expect inflows in form of coupon during life of the bond and principal payback at maturity. The present values of bond coupon and maturity amount sums up to make the price or present value of the bond. The higher discount rate will reduce the present value of the bond and lower the discount rate will gives us higher present values. Mathematically, the discount rates are places in denominator hence, the higher the weight of denominator lower the present values and lower the weight of denominator higher the present value.

Hence, we see inverse relationship between interest rate and bond price.