What is Bond Valuation?
What is a Bond Valuation?
Bond valuation is a quantitative approach to determining the market value of a bond. In other words, by some genius came up with a mathematical formula to tell you how much you can sell a bond for. Wouldn’t it be nice for someone to do this for old video games…
Variables included in valuing bonds.
As with most mathematical formulas, there are several variables included in the bond valuation formula.
The coupon rate is the rate that interest payments are based on. For example, if the bond face value is 1,000 and the coupon rate is 9%, then the bond interest payment would be $90.00.
A person can find this rate on the bond certificate.
The maturity date for a bond is when the borrowing company will return the funds. As we all know, a bond is just a person lending a company money for a specific period of time. Once this time is up, the money is returned to the person. The maturity date is the day the funds are returned to the lender (a.k.a. you, if you hold the bond).
The face value of a bond is the dollar amount originally loaned. Again, this amount may be found on the bond certificate. Usually, the face value of a bond for a public corporation in the US is $1,000.
The compound period is how often interest on the bond is paid to the bond holder. In most cases, the compound period is 2. In other words, a bond holder receives interest payments twice a year.
Yield to Maturity:
The yield to maturity is the rate that other public companies, with similar credit ratings, are issue bonds for at the moment. This rate is used to discount cash flows back to present day dollars.
The formula for bond valuation is as follows:
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