Bond valuation is a technique for determining the theoretical fair value of a particular bond. Bond valuation includes calculating the present value of the bond's future interest payments, also known as its cash flow, and the bond's value upon maturity, also known as its face value or par value. Because a bond's par value and interest payments are fixed, an investor uses bond valuation to determine what rate of return is required for a bond investment to be worthwhile.
A bond is a debt instrument that provides a steady income stream to the investor in the form of coupon payments. At maturity date, the full face value of the bond is repaid to the bondholder.
The characteristics of a regular bond include:. Since bonds are an essential part of the capital markets, investors and analysts seek to understand how the different features of a bond interact in order to determine its intrinsic value.
Like a stock, the value of a bond determines whether it is a suitable investment for a portfolio and hence, is an integral step in bond investing. The theoretical fair value of a bond is calculated by discounting the present value of its coupon payments by an appropriate discount rate.
It takes into account the price of a bond, par value, coupon rate, and time to maturity. Calculating the value of a coupon bond factors in the annual or semi-annual coupon payment and the par value of the bond. The present value of expected cash flows is added to the present value of the face value of the bond as seen in the following formula:.
A zero-coupon bond makes no annual or semi-annual coupon payments for the duration of the bond.
Instead, it is sold at a deep discount to par when issued. To calculate the value of a zero-coupon, we only need to find the present value of the face value.
What is 'Bond Valuation' Bond valuation is a technique for determining the theoretical fair value of a particular bond. Below par is a term describing a bond whose market price is below Coupon stripping is the separation of a bond's periodic interest To determine the value of a bond today — for a fixed principal par value to be repaid in the future — we can use an Excel spreadsheet.
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