Security Valuation: Bond valuation: Meaning, Characteristics and valuations

Security Valuation.

Meaning

The process of determining how much a security is worth. Security valuation is highly subjective, but it is easiest when one is considering the value of tangible assets, level of debt, and other quantifiable data of the company issuing a security.

What is 'Bond Valuation'?

1. Bond valuation is a technique for determining the theoretical fair value of a particular bond.

2. Bond valuation includes calculating the present value of the bond and future interest payments.

3. Its cash flow and maturity date are plays important role in calculating bond value.

4. An investor uses bond valuation to determine what rate of return could be get in future.

5. A bond is a debt instrument that provides a steady income stream to the investor in the form of coupon payments.

The characteristics of a regular bond include:

• Coupon rate: Some bonds have an interest rate, also known as the coupon rate, which is paid to bondholders semi-annually. The coupon rate is the fixed return that an investor earns periodically until it matures.
• Maturity date: All bonds have maturity dates, some short-term, others long-term. When the bond matures, the bond issuer repays the investor the full face value of the bond.
• Current Price: Depending on the level of interest rate in the environment, the investor may purchase a bond at par, below par, or above par. Also the bond will trade at a discount, that is, below par. However, the bondholder will be paid the full face value of the bond at maturity even though he purchased it for less than the par value.

Bond Valuation in Practice

• 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 
• Bond valuation is calculating the present value of a bond’s expected future coupon payments. It takes into account the price of a bond, par value, coupon rate, and time to maturity.

Coupon Bond Valuation

·       

• Calculating the value of a coupon bond factors in the annual or semi-annual coupon payment and the par value of the bond.

Zero-Coupon Bond Valuation

• 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  when it is issued.
• The difference between the purchase price and par value is the investor’s interest    earned on the bond.
• To calculate the value of a zero-coupon, we only need to find the present value of     the face value.