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BOND

VALUATION

Maria Louisa Omega


WHAT IS BOND VALUATION?
Bond valuation is a technique for determining the 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 an investment in a
particular bond to be worthwhile.
BREAKING DOWN BOND
VALUATION
Bond valuation is only one of the factors investors
consider in determining whether to invest in a
particular bond. Other important considerations
are: the issuing company's creditworthiness, which
determines whether a bond is investment-grade or
junk; the bond's price appreciation potential, as
determined by the issuing company's growth
prospects; and prevailing market interest rates and
whether they are projected to go up or down in the
future.
BOND VALUATION
The value of any financial asset a stock, a bond,
a lease, or even a physical asset is the present
value of the cash flows the asset is expected to
produce.
FORMULAS
To find the value of any bond:

Bonds value = N INT M


(1+rd)t + (1+rd)N
t=1
Where:
Rd = the market rate of interest on the bond
N = number of years before the bond matures.
INT = interest paid each year ( coupon rate x par value)
M = the par, or maturity, value of bond
EXAMPLES
The cash flows for a standard coupon bearing
bond, like those Bighit Ent, consist of interest
payments during the bonds 5-year life plus the
amount borrowed P100,000 with a market rate
interest of 10% when the bond matures. Find the
value of the bond.
To get the value of each payment:

VS = INT

(1+Rd)t
For the first payment:

P10,000

(1+0.10)1 = P 9,090.91
To get the value of bonds:

5
VS = P10,000 P100,000

t=1 (1+0.10)5 + (1+0.10)5

= P 68,301.332
BOND TIMELINE

Rd %
0 1 2 3 4 5

10,000 10,000 10,000 10,000 10,000


100,000

P 110,000
9,090.91 8,264.46 7,513.15 6,830.13 6,209.2
68,301.332

Present Value= P100,000

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