Hi all! I work in Credit research division and we generally do relative valuation of bond by taking in to account modified duration (x axis) and G-spread(Y axis) of the bonds of the company we are working on and its peers. And finally we plot it on graph and make the trendline. Now can someone please explain that what all interpretation we can make from this graph? For eg let’s say that company has majority of its bond is above(or below) the trendline? So at very high level can we say that that its bonds are cheaper(or expensive)? Also what other interpretation and how a fund manager will take a call of investing in the bond on the basis of this chart? I hope I’m clear Many Thanks!!
The quadrants would be credit and interest rate risk, no? So you can have high low of each depending where it falls. Im not a fixed income guy but I’m not sure these variables are in a dependent and independent relationship
It seems like this would just show you the market credit spread for each company by maturity, relative to the industry, and without considering whether that spread over or under prices risk.
Anyway, someone there is producing the graph. It seems like they intend to show something - you could just ask them.
Dependent and independent relationship do exist here as spreads on bond depends on the duration of the bonds. Interest rate risk is implied by ur duration and credit risk by ur spread, so yes I think that quadrants are credit and interest risk.
Thats what I feel as it would just show us credit spread by maturity/duration. And you cant just straightaway tell from this kind of chart that the bond is cheaper or expensive as you will need to consider the bond rating and other parameters also. Like two bonds with same duration can have big difference in their spreads because of their ratings. just wanted to know what if I am missing out on something important here.
They are related, but the variables do not seem independent of each other.
Does anyone have a list of practical books/PDFs/Links that i can read for understanding relative valuation (be it bonds/loans). If you can share your mail id, i can mail you.
I heard this Fabozzi guy may know a thing or two about bonds…