Dynamics of Fixed Income: Significant & Valuation

Dynamics of fixed income: Fixed income analysis is the process of analysing and evaluating the fixed income asset or securities for fulfilling the investment objectives.

It represents the distinguished asset class. Analysts and trader practice fixed income analysis to:

  • Evaluate the risk associated with the underlying debt asset and to evaluate the capacity of the purchasing entity to match its financial obligations (known as credit analysis).
  • For identifying the fact that which mortgage asset will provide alluring investment opportunities
  • For determining an appropriate value of mortgage securities in the monetary market.
  • Helps in comparing the investment characteristics including return and risk of mortgage securities with other asset classes and with each other such as real estate, stocks, derivatives and some more.

Significant Terms Associated with Fixed Income

Some of the relevant terms associated with the fixed income assets include:

1) Corporate Bonds versus government: On an expansive level, fixed-income assets can be categorised as:

  • Government- examples for this are U.S treasuries.
  • Corporate- these are the bonds which are issued by the public corporations.

2) Issuer: It refers to the entity or corporation or party that sells the debt agreement to the traders (it is the borrowing party).

3) Debt asset holder or Borrower: It is the entity that has purchased the debt agreement from the lender.

4) Principal or Face value: It is the borrowed amount which has to be returned on a fixed future date.

5) Interest: It is the rate of interest applied to the principal acquired amount.

6) Periodic payments: These are the periodic dates on which one has to make regular payment of interest (on principal amount).

7) Maturity: The duration of time from the beginning of the debt to its close.

8) Fix-Income options: These are the options embedded within the income asset giving the borrower or lender power to either repay the obligation.

9) Callable Bond: It is the debt asset that can be reclaimed before the maturity date by the issuer. They allow the companies to pay off the related debts early and receive advantages for the favourable drops in the interest rates.

10) Putable Bond: A put bond is an instrument of debt which allows the holder to force the lender to repurchase the asset at a specific date before maturity. This repurchasing amount is decided at the time of issuing the bond.

11) Convertibility: This feature allows the asset holder to convert the debt agreement into a common asset.


The cash flow of a fixed income output usually consists of repayment of the face value at the time of maturity and coupon payments over the bond’s life. The time value of money approach determines the present cost of cash flow because it happens several times in the future. The aggregate of all the current values of the bonds cash inflows is a theoretical value.

The demand for fixed income output comes from external government treasuries, pension fund companies, insurance, banks companies, individual traders like retirees who need continuous fixed cash in-flow, endowment firms.

The fixed income critics cover the yield curve or term structure for analysing the income. Such data enables one to understand the differences between different inter-market bonds such as Eur 2 years, five years and ten years bonds).

Other approaches for calculating fixed income outputs are relative value approach, technical approach and fundamental approach.


Fixed income analysis is an analytical framework popularly used to assess and measure the fixed income asset for fulfilling the investment purpose. It includes risk analysis, credit analysis, along with bond valuation.

The phenomena applies to assets, such as corporate bonds and government bonds. It plays a vital role in the pricing and trading of instruments in the financial market.