Fixed-income traders are most commonly employed in the investment banking industry, although they might also work for hedge funds, institutional investors or single corporations. Fixed-income traders are investment professionals whose specialty is buying and selling fixed-income securities, either for institutions, individual clients or groups of clients.

Fixed-Income Securities

Most people immediately think of government, corporate or municipal bonds when they hear the words "fixed income," but fixed-income securities can include mortgage loans and a variety of financial derivatives of interest rate, corporate and credit products.

Typically, many fixed-income traders further specialize in handling specific types of fixed-income investments, such as government or corporate bonds. To be successful, fixed-income traders must not only be skilled at evaluating specific investment opportunities; they must also be able to analyze and assess current market and economic conditions and trends.

The questions encountered in a job interview for a position as a fixed-income trader are likely to range from general economics to specific market and investment analysis. The interviewer is looking to gauge the candidate's knowledge of concepts related to fixed-income investing and to get an idea of the candidate's potential ability as a trader.

Fixed-Income Traders Should Understand the Yield Curve and Its Significance

The yield curve is one of the most basic concepts in fixed-income investing and interest rate products, so it is important to show a solid understanding of both the term and its implications. The yield curve, also referred to as the term structure of interest rates, is a line on a graph that plots the interest rates of bonds that have equal credit quality against the bonds' different maturities, from shortest term to longest. The most commonly considered yield curve compares the rates on U.S. Treasury debt with maturities ranging from three months to 30 years.

The yield curve is significant for several reasons. It is used as a benchmark for calculating other interest rates, such as mortgage loan rates. It is also considered to be a general economic indicator. A normal yield curve, indicative of a solid or growing economy, reflects higher yields corresponding to longer maturities. Slowing or weak economies can produce an inverted yield curve where higher yields are received on shorter-term debt. A relatively flat yield curve indicates general economic uncertainty or a period of economic transition.

Fixed-Income Trading and Interpreting Cash Flow Statements

The ability to read and interpret financial statements to evaluate the financial health of a company is crucial for corporate financing decisions. The major items shown on a cash flow statement are operating activities, investing activities, financing activities and the ending cash balance.

You can expand on that answer in your interview by delineating the things contained under each major heading. Operating activities include net income, accounts receivable, accounts payable and inventory. Investing activities include items such as capital expenditures and sale of land. Financing activities can include dividend payments or bond repurchases.

Fixed-Income Traders Must Discuss Economic Indicators Considered in Fed Rate Decisions

Understanding the Federal Reserve and its role in determining interest rates, as well as the potential impact of the Fed's actions on the economy, is mandatory for anyone working with fixed-income securities. The major economic indicators monitored by the Federal Reserve and that influence interest rate policy are inflation indicators such as the Consumer Price Index (CPI), the Producer Price Index (PPI), the unemployment rate, economic growth indicators such as GDP, and the performance of financial markets.

Are You a Fixed-Income Trader That Takes More Risk or Is Risk Averse?

This might be a bit of a trick question, but it is designed to legitimately assess your suitability as a fixed-income trader. The proper answer is "more risk averse" for the simple reason that the overwhelming majority of fixed-income investors are not looking for substantial capital appreciation but for safe regular income.

Good fixed-income traders are thus not going to be inclined to seek out high-risk, high-reward opportunities, but would be more inclined toward identifying the most solid investments.

You might add in the course of answering this question, however, that you aim to identify the most profitable investment opportunities available within strict risk limitation parameters. This indicates you are not going to be the absolute most conservative of traders, always settling for safe but minimal returns; instead, you're going to actively search for the best fixed-income securities for clients or your employer.

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