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Total Posts: 244
Joined: Mar 2018
Posted: 2019-01-11 21:07
In equities the notion of relative value is quite easy to understand.

However, in fixed income this is complicated by coupons. Therefore I am not sure whether you would use the dirty price or clean price when looking at RV


Total Posts: 751
Joined: Jun 2005
Posted: 2019-01-11 22:53
Three points:

Clean and Dirty, are traditional methodologies to quote price, however, it would be useful if you can make easy translation into fair valuation. Relative value works if you are within a market full of liquidity and perfect competition between issuers. But how do you compare bonds issued by Apple, Samsung and Huawei? They fight for the same smartphone market, but have those "tiny" differences... (I grossly exaggerate of course)

Also, if you think about main bond CFs not in terms of spread but in terms of notional, you will notice that 100 is much bigger than coupons value of scale of ~1-10... Which means - liquidity, which also interplays with credit spread. How do you interpret that with your RV model?

Balance sheet analysis gives valuable information as well. Passive part of the balance sheet is divided into Debt (Bonds are part of it) and Equity (mostly shares). Debt + Equity (right side) is matched into Assets (left side), which are (supposedly) generating the profit ! From this perspective complicated investor weighs potential profit from equity (dividends) with that from bonds (coupons). These are interrelated.

You see? It might be even dangerous to think in terms of Relative Value, because there is no absolute benchmark nowadays.


Total Posts: 244
Joined: Mar 2018
Posted: 2019-01-11 23:07
whats a bond CF?


Total Posts: 3454
Joined: Jun 2004
Posted: 2019-01-12 08:40
Cash Flow

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken
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