What Is Bond Valuation?
Bond valuation is the process of determining the fair value of a bond. Like other capital investments, the fair value of a bond is the present value of its expected future cash flows. Therefore, the fair value of a bond is the present value of the bond's expected cash flow after discounted by a suitable discount rate.
Bond valuation
Right!
- Bond valuation is the process of determining the fair value of a bond. Like other capital investments, the fair value of a bond is the present value of its expected future cash flows. Therefore, the fair value of a bond is the present value of the bond's expected cash flow after discounted by a suitable discount rate.
- Calculation of Present Value Relationship
- The fair price of direct bonds can be determined by discounting the expected cash flow:
- cash flow:
- Coupon C paid every certain period; the face value of the bond is F, and the bond is paid after the T period (the payment amount in the last year includes the face value of the bond and the coupon of the year)