ABSTRACT
Bond valuation is the process of valuing long-term debt securities. Bonds are fixed-income financial claims issued to investors by corporations, governments, and government-sponsored enterprises. There are many different types of bonds with a vast array of features that vary widely. Bond types range from the “plain vanilla” described in most textbooks to exotic high-risk offerings, some that even have equity features and options embedded in them. The process of valuing each type of bond, however, has a similar starting point. The starting point in valuing bonds, as it is with other financial securities and investment projects, is a discounted cash flow (DCF) analysis. This approach takes forecasted cash flows occurring over the life of the instrument and discounts these projected values to account for the risk inherent in owning these instruments and the time value of money. Other factors may play a significant role in the pricing, but the key elements in bond valuation are the estimation of the cash flows and determining the appropriate discount rate to be used in calculating the present value or price of the bond in question.
