Understanding Bond Valuation

What is bond valuation ?

Basically, bond valuation is a method used to determine fair value. In this calculation is done to calculate cash flow by looking at the present value of payment of future interest payments. Then a nominal value is calculated for calculating the value at maturity. Valuation of bonds added as present value plus additional value of cash flows that occur from the present to maturity can be obtained from the amount of the difference between present value and future value.


Find the value of bond

The first step that needs to be done is to look for the present value (PV) of the future cash flow of the bond. The Present Value of each individual cash flow must be sought first so that the value will be found. The next step is to find bond prices from the addition of the previous numbers.

PV at time T = expected cash flows in period T / (1 + I) to the T power


Then add the individual cash flows:


Value = present value @ T1 + present value @ T2 + present value @Tn


After calculating with the formula above, the value of bond will be found.

Usually investors see the level of control gained from a bond investment by using bond valuation so that the value of the investment made will be seen in value. In principle, to achieve the expected value of a bond, the basic thing that becomes the initial guide when an investor wants to invest in a bond is by evaluating the bonds. In the value of a bond it has been seen whether it has value or not, it becomes the first step for investors in making investment decisions.


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1 thought on “Understanding Bond Valuation

  1. Interesting article

    Would u mind telling me, how to calculate expected cash flows in period T ?
    Is that from forecasting analysis ? if yes, which type of cash flow we use?

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