Fixed Income Part 2
Author: rusman
What determines the evolution of fixed income?
Consider that there are several factors that may affect the valuation of fixed income:
* the credit quality of the issuer. In this type of issues are risks that the company issuing the securities is unable to pay interest or repay the principal. The more likely it an issuer cannot repay the debt, plus interest receivable will want to take that risk. If an issuer of debt is qualified again with another rating, debt that is quoted on secondary markets will be affected by raising the interest rate (lose) if it qualifies worse, and lowering it (win) if they are better qualified.
* The range of interest rates affects new issues, and therefore the existing traded on secondary markets because they can achieve greater value if rates fall, or lose value if they rise.
* The maturity because longer-term is often given a better interest rate, but there is also more sensitive to exchange rate fluctuations and is more likely to go. Let’s say that emissions to very short term (few months) is not greatly affected by such changes because their maturity is nearby, but the long term (several years) if they are affected by these changes.
The credit quality.
There are a number of entities that are responsible for certifying the creditworthiness of companies and states. These entities issue a certification or rating by which we know (more or less) the risk we take.
The two main certifiers are Standard & Poor’s and Moody’s. Both distinguish themselves two categories … Bonuses for investment and speculation, the former being far more secure and the second high-risk (known as junk bonds or high yields):
* The Moody’s ratings for the long term go (following order from most to least safe):
or Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2 and Baa3 to the scale of investment.
Or Ba1, Ba2, Ba3, B1, B2 and Caa1, Caa2, Caa3, CC and C for the speculative level.
* The Moody’s ratings for the short term are to:
or P1, P2 and P3 for the scale of investment.
or NP and D for the speculative level.
* The ratings of Standard & Poor’s for the long term go to:
or AAA, AA, A, BBB for the scale of investment.
Or BB, B, CCC, CC, C and D for the speculative level.
* The ratings of Standard & Poor’s for the short term are to:
or A1, A2 and A3 for the scale of investment.
Or B, C and D for the speculative level.
The maturity and variation of types.
Interest rates on these assets are sold fluctuate depending on supply and demand which can affect not only new issues but also to existing ones that wish to trade in secondary markets.
Let’s look at an example:
This example is only to be understood the concept of fixed income, need not reflect the actual way in which these operations are performed.
Suppose the company you work 100 promissory notes issued to its employees amounting to 1,000 euros a carrier with a maturity of 10 years (you cannot charge up to 10 years). The company tells its employees to say how much to pay for it, and deliver them to the best deals:
In the company there are a total of 5 employees interested in the offer (well actually 4, since we decided to make an offer at 9.60% APR not look bad but we are not concerned and not a good idea to link a product investment or savings to the company you work … if it breaks we are left without work and without money).