Traditional credit analysis is a bottom-up approach which focuses on the selection of companies. The credit quality/risk has to be determined and the two following questions have to be answered:
- Is the issuer able to make the coupon payments?
- Will the company value at maturity be large enough to pay back the principal?
During highs and lows of market cycles psychological and technical factors tend to push asset prices to extremely elevated or depressed levels. At those times it is appropriate to focus on credit fundamentals and detect companies where such moves were not justified. Credit analysis should be able to identify opportunities to add substantial yield by assuming only little higher credit risk at the same time. The following paragraphs describe a possible way of analyzing the credit risk and investing in corporate bonds.
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