Fixed Income Relative Value Analysis, + Website - (Bloomberg Financial) by Doug Huggins & Christian Schaller (Hardcover) (2024)

FAQs

What is relative value analysis of fixed income? ›

Relative value can be defined as expected price convergence of contracts or portfolios with similar risk profiles. For fixed income this means similar exposure to duration, convexity and credit risk. The causes of relative value are limited arbitrage capital and aversion to the risk of persistent divergence.

Relative-value arbitrage is an investment strategy that seeks to take advantage of price differentials between related financial instruments, such as stocks and bonds, by simultaneously buying and selling the different securities—thereby allowing investors to potentially profit from the “relative value” of the two ...

Fixed-Income Relative-Value Investing (FI-RV) is a hedge fund investment strategy made popular by the failed hedge fund Long-Term Capital Management. FI-RV Investors most commonly exploit interest-rate anomalies in the large, liquid markets of North America, Europe and the Pacific Rim.

Relative value credit strategy depends on the isolation of identical or very similar credit instruments, where one is assessed to be comparatively under- or overvalued. These might be bonds issued by the same borrower but at different points of the yield curve or be bonds issued by different but similar borrowers.

To determine the value of a fixed income security, the analyst must estimate the expected cash flows from the investment and the appropriate required yield. The cash flows consist of: periodic interest (known as coupon) payments prior to the maturity date, and. the repayment of the principal at par value upon maturity.

The Rich/Cheap Analysis can be used to assess the price of each bond credit rating. whether each bond is priced too high or too low in comparison to other bonds with the same credit grade by evaluating 3 groupings 1. Cheap: That bond is cheap because it is above the upper bound.

One of the ways beginners can implement the most profitable trading strategies effectively is by embracing the buy-and-hold strategy. This involves researching companies with solid fundamentals and stable earnings, then holding their stocks for a long time without being swayed by short-term market fluctuations.

Clear guidelines: The 5-3-1 strategy provides clear and straightforward guidelines for traders. The principles of choosing five currency pairs, developing three trading strategies, and selecting one specific time of day offer a structured approach, reducing ambiguity and enhancing decision-making.

Ashurst said RV sales took off as Americans looked outdoors for social-distance-safe activities, then decelerated down almost 50% from their 2021 peak. Higher interest rates have also cut into demand.

Relative value strategies can be used to express views on economic and policy outlooks across countries, or dislocations within a single market, while limiting exposure to conventional fixed income risks.

Is an RV a good asset? ›

For example, if you plan to live in your RV full-time or take frequent RV trips, owning your vehicle might be a good investment, as it'll help you save on RV rental fees, hotels, flights, and more.

'Fixed income' is a broad asset class that includes government bonds, municipal bonds, corporate bonds, and asset-backed securities such as mortgage-backed bonds. They're called 'fixed income' because these assets provide a return in the form of fixed periodic payments.

Relative value is a method of determining an asset's worth that takes into account the value of similar assets. This is in contrast with absolute value, which looks only at an asset's intrinsic value and does not compare it to other assets.

Understanding Relative Valuation Models

It is calculated by dividing stock price by earnings per share (EPS), and is expressed as a company's share price as a multiple of its earnings. A company with a high P/E ratio is trading at a higher price per dollar of earnings than its peers and is considered overvalued.

The bond valuation formula can be represented as: Price = ( Coupon × 1 − ( 1 + r ) − n r ) + Par Value ( 1 + r ) n . The bond value formula can be broken into two parts for better understanding.

Relative valuation, also referred to as comparable valuation, is a very useful and effective tool in valuing an asset. Relative valuation involves the use of similar, comparable assets in valuing another asset. In the real estate market, relative valuation forms the framework for valuing a piece of real estate.

An example of this is that you are occasionally able to simultaneously buy and sell convertible debt instruments along with their underlying stock. In doing this, you are effectively exploiting temporary discrepancies in their valuations. More often, your trades are more speculative.

If Company A were trading at 20 times its EPS, the industry average, it would be trading at a price of $40, which is the relative value. In other words, based on the industry average, Company A is trading at a price that is $10 higher than it should be, representing an opportunity to sell.

While relative valuation models seek to value a business by companies to other companies, intrinsic valuation models see to value a business by looking only at the company on its own.