Relative Value Analysis of Fixed-Income Products
There are two basic approaches to the valuation of fixed-income products. The discounted cash flow method seeks to value a bond given assumptions about cash flows, reference yield curves, risk premiums, and so on. Given these inputs, the bond's value is determined. Once computed, this value is compared to the prevailing market price and a rich/cheap determination can be made. The alternative method, relative valuation, is less ambitious and not surprisingly more popular.
Tools of relative value analysis, when properly interpreted, give the user some clues about how similar bonds are currently valued in the market on a relative basis. This battery of tools allows us to ...
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