Sample interview questions: How do you assess the credit risk associated with fixed income investments?
Sample answer:
Assessing Credit Risk in Fixed Income Investments
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Reviewing Issuer Credit Ratings: Obtain credit ratings from reputable agencies (e.g., Moody’s, S&P Global Ratings, Fitch Ratings) to gauge the issuer’s creditworthiness. Ratings indicate the likelihood of a default and serve as a proxy for credit risk.
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Analyzing Financial Statements: Examine the issuer’s balance sheets, income statements, and cash flow statements. Key metrics to consider include:
- Leverage (debt-to-equity ratio)
- Interest coverage ratio
- Debt service coverage ratio
- Cash flow from operations
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Assessing Management and Governance: Evaluate the experience and track record of the issuer’s management team. Consider the issuer’s corporate governance practices to assess the likelihood of prudent decision-making.
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Evaluating Industry Conditions: Analyze the industry in which the issuer operates. Factors such as economic cyclicality, competitive intensity, and regulatory risks can impact the issuer’s ability to generate cash flow and meet its obligations.
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Conducting Stress Testing: Simulate various economic and market scenarios to assess the issuer’s resili… Read full answer