Fixed income markets encompass a broad universe of government, municipal and corporate debt, each offering investors predictable coupon payments and principal return upon maturity. Bond valuation hinges on discounting these future cash flows at an appropriate yield, which reflects prevailing interest rates, credit quality and liquidity conditions. The inverse relationship between yields and prices means that rising rates erode bond values, while falling rates boost them, making duration a critical measure of sensitivity.
Credit analysis further enriches valuation by assessing issuer solvency through financial statements, debt covenants and macroeconomic indicators. Investment‑grade bonds tend to offer modest spreads over risk‑free benchmarks, whereas high‑yield or “junk” bonds compensate investors for elevated default probabilities with richer yields. Portfolio managers blend duration positioning with credit and convexity strategies to achieve income goals while managing interest‑rate risk, using derivatives such as interest‑rate swaps or futures when direct bond positions are impractical.