How do I determine the real value of the bond?
The most common method of determining the fair value of the bond is to calculate the current value of all expected future cash flows from the bond. For this purpose, the following variables usually need: maturity, discount rate, coupon rate and nominal value. In essence, the period of maturity is the time before the bond issuer returns the money owed by the bond holders for nominal value, which is usually a round number. The discount rate is generally the level of return that the investor expects to receive if the bond is held up to a maturity that is usually referred to as bond yields. Finally, the coupon rate is essentially a common interest rate paid to the bond holders up to the maturity, where the investor receives the final payment of the coupon along with the nominal value.
When purchasing a bond investor, the investor usually expects to receive a number of monetary toilets. For example, a bond that has tRomaneous maturity and pay for USD dollars per year, would mean that at the end of three years the nominal value of $ 1,000 was returned at the end of three years. This means that the bond holder will receive three separate cash flows. This means that the investor will receive $ 100 in the first year, $ 100 in the second year, and the last installment will be $ 1,100 at the end of the year. To determine a fair price for such a bond, it is necessary to calculate the current value of all cash flows using a discount rate and a maturity period.
In the finances, the basic principle, which is the basis of the practice of finding the current value of future cash flows, is called the time value of money (TVM). This concept states that the dollar obtained today is more valuable than in the future. For example, a $ 100 cash flow has more than 100 USDFLOW SH in the second year and so on. To determine the real value of the bond it is necessary to find the current value of each cash flow separately and then add all these current values to dRighteous prices took away. The formula used for this is as follows: p = c/(1 + r) + c/(1 + r)^2 +. . . + C/(1+ r)^n+ m/(1+ r)^n, where P is the real value, C is coupon, r is a discount rate, n is the number of full years to maturity and m is a nominal value.
For illustration, it helps to consider a bond that has a nominal value of $ 1,000, pays $ 100 per year, with a yield of 9% or discount rates, and ripen in three years. P = 100/(1+0.09)+100/(1+0.09)^2+100/(1+0.09)^3+1000/(1+0.09)^3, which is equal to a real value of $ 1025.31. It is important to note that the discount rate is expressed in decimal places if the financial calculator is not used. The financial managers generally take the above variables and use a financial calculator or software for the retention table that makes it a cinch. The method described above also applies to links known as vanilla ties that are most common, albeit to determine the value of other types of financier bondsthe above and/or its variants.
Furthermore, the real value of the bond will always be above the nominal value if the coupon rate is higher than the discount rate called a premium bond. For example, if the bond has a 10% coupon rate and a 8% discount rate or return, its value will be above $ 1,000. Conversely, if the discount rate is higher than the coupon rate, its value will also be referred to as a discount bond. For example, a bond with 12% yield and 10% coupon will be worth below $ 1,000. Finally, the real value of a bond with the same coupon rate and the discount rate is at the nominal value, or its real value will be $ 1,000.