This lesson examines the valuation of fixed income securities and the analysis of credit risk.

4.1 Bond Valuation
Bond valuation is based on the present value of expected cash flows (coupon payments and principal). Regent’s University covers “analysis of the management of investment portfolios, containing fixed income [and] equities” . Key concepts include:

  • Yield to Maturity (YTM): The total return anticipated if the bond is held to maturity.

  • Duration and Convexity: Measures of a bond’s price sensitivity to interest rate changes.

  • Credit Spread: The additional yield over the risk-free rate to compensate for credit risk.

4.2 Credit Risk Analysis
Credit risk analysis is essential for evaluating corporate and sovereign bonds. The Durham University module covers “analysis and valuation; Managing fixed income securities” . This involves:

  • Assessing the probability of default .

  • Analysing financial ratios and credit ratings.

  • Evaluating the terms of the bond’s indenture.

4.3 Bond Portfolio Strategies
Strategies include passive strategies (buy and hold, indexation) and active strategies (interest rate anticipation, sector rotation).

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