Asset-liability management refers to the process in which assets and cash flows of an enterprise are adequately managed to minimize the risk which arises from the failure of payment of liabilities on time. These are generally utilized in bank loan portfolios and pension plans. 

Fixed income research and credit research play a crucial role in asset-liability management and providing accounting support to an enterprise. It refers to the process where the total value of debt is computed, keeping in mind the economic considerations, demand-supply conditions, interest rates, and the risk of failure of repayment. So, let's get you started on the significance of such analysis and the factors affecting it.

Significance of Analysis of Fixed Income and Credit 

For asset managers and investment banks, the whole accounting system process is simplified, and they can work on expanding and monitoring portfolios. Moreover, such analysis helps in making informed decisions and improves the overall efficiency of the enterprise. The significance of such analysis is explained below. 

• Expanding and Monitoring Portfolios 

An ideal portfolio comprises securities from multiple companies. By evaluating the performance of different securities through such analysis, asset managers can determine which securities will perform better in the long run. Therefore, such analysis helps in expanding and diversifying portfolios. 

• Informed Decision-Making Process

There are numerous decisions that asset managers and investors take while managing the enterprise. These include decisions about controls and integrated accounting procedures. With the help of such analysis, management can check the needs of the enterprise and align with the market forces and make informed decisions accordingly. 

• Enhance Overall Efficiency of Enterprise 

An enterprise’s efficiency is determined by the level of asset-liability management it displays. If timely repayments are made and proper records of assets are kept, the enterprise gets an edge over its competitors. With fixed income research analysis, such efficiency can be achieved by an enterprise.  

Factors Affecting Fixed Income Analysis

There is a myriad of factors that affect fixed income analysis. These include interest rate changes, failure of repayment, and liquidity risk. Let’s check a few below: 

• Interest Rate Changes 

Interest rate changes are the primary risk factor that affects the bond price. There is an indirect relationship between the cost of a bond and the interest rates. This correlation means that when there is an increase in the interest rates, the bond prices fall and vice versa. The main reason behind this is that the investors have the advantage of purchasing a bond with higher interest rates, leading to a fall in the previously issued bonds. 

• Failure of Repayment

Counterparty or Default or Credit risk refers to the risk of default which means that the borrowers might fail in paying the required amounts. The issuer may run out of business, leading to loss of payment of the interests and the principal amount. This loss can, in turn, lead to disturbances in cash flows and rising costs of collection. In cases of high yield bonds, the issuers face greater chances of default risks as there are more significant changes or defaults. For making up for these more considerable risks, the investors are compensated by the soaring interest rates.

• Liquidity Risk

Liquidity Risk refers to a financial risk that the market price of a financial asset or security can be affected for a given period when the same cannot be sold in the market. Usually, the bonds are sold and bought over the counter, which results in them having liquidity risk. However, it is not the case if you have invested in government debts. In stock markets, investors can easily exit, but the investors trading in bonds depend on secondary markets. In case the investors want to exit, they have very limited choices in secondary markets for selling.

Conclusion

The fixed income research analysis is an effective tool that asset managers and investment banks can use for the smooth functioning of the enterprise. It is very significant and assists in achieving the long-term objectives of the organization. With the help of a leading fixed-income research analysis provider, you can now avail such top-quality research and analysis services for your enterprise.