Fixed income analysis is the process of evaluating and analyzing fixed income securities for investment purposes.
Fixed Income represents a distinct asset class. Investors and analysts perform fixed-income analysis to
Evaluate the risk characteristics underlying debt securities and to assess the capacity of the borrowing entity to meet its financial obligations (credit analysis)
Identify which debt securities represent attractive investment opportunities
Determine the appropriate valuation (or value) of debt securities in the market
Compare the investment characteristics (e.g., risk and return) of debt securities with each other and with other asset classes such as stocks, derivatives, real estate, or other.
Features and Characteristics of Fixed Income
Some important features of fixed income securities include
Government versus Corporate Bonds
On a very broad level, fixed income securities can be categorized as
Government
E.g., US Treasuries
Corporate
Bonds issued by public corporations
Issuer
The party, entity, or corporation that sells the debt obligation to investors
This is the borrowing entity
Borrower or Debt Security Holder
The party that has purchased the debt obligation (i.e., the lender)
Principal or Face Value
The amount borrowed which has to be repaid in full at a future date
Interest
The interest rate that is applied to the principal borrowed amount
Periodic Payments
The periodic dates during the life of the debt for which the borrower is responsible for making regular payments of interest or principal (or both)
Maturity
The length of time from the inception of the debt to its termination
Fixed-Income Options
Options embedded within fixed income securities giving the lender or borrower the right to either redeem the obligation
Callable Bond – the issuer of the debt obligation retains he right to redeem the bond before its maturity date
Putable Bond – the holder of the debt obligation (the borrower) retains the right to redeem the bond before its maturity date
Convertibility
Convertible debt securities allow the debt security holder to convert the debt obligation into common equity