Sample interview questions: How do you assess the impact of changes in credit ratings on fixed income securities?
Sample answer:
Assessing the Impact of Credit Ratings on Fixed Income Securities
Credit ratings play a crucial role in assessing the risk and expected returns of fixed income securities. Changes in credit ratings can significantly impact the value and liquidity of these investments.
Impact of Credit Downgrades:
- Increased Risk Premium: Lower credit ratings indicate higher default risk, leading to a demand for higher yields (risk premium) to compensate investors.
- Reduced Liquidity: Downgrades may trigger selling pressure, reducing liquidity and making it more challenging to exit positions.
- Portfolio Impact: Bonds with downgraded ratings may need to be re-classified into higher risk categories, potentially impacting portfolio returns and risk metrics.
- Collateral Value: Fixed income securities are often used as collateral. Downgrades can affect their eligibility or value as collateral, impacting borrowing costs and access to credit.
Impact of Credit Upgrades:
- Reduced Risk Premium: Higher credit ratings indicate lower default risk, resulting in lower yields.
- Increased Liquidity: Read full answer
Source: https://hireabo.com/job/1_2_25/Fixed%20Income%20Analyst