Bond valuation is a technique for determining the fair price of a bond. The theoretical fair value is the present value of the stream of cash flows it’s expected to generate.
Now that you have a basic understanding of what bond ratings are, we’ll look at bond valuation and how you can use it to select your investments.
What is a Bond Valuation?
Bond valuation is a technique for determining the fair price of a bond. The theoretical fair value is the present value of the stream of cash flows expected. Bond valuation includes calculating the present value of the bond’s cash flow (future interest payments), and the bond’s par value (value upon maturity)
A bond’s par value and cash flow are fixed, so investors need simply to look to bond valuation to determine whether an investment in a particular bond would be worthwhile. It’s only one of the factors investors consider in determining whether to invest in a particular bond, though. Other important considerations are: the issuing company’s creditworthiness, the bond’s price appreciation potential, prevailing market interest rates, etc.
Bond Valuation Formula
Firstly, the present value of the bond’s future cash flows should be determined. The present value is the amount that would have to be invested today in order to generate said future cash flow. It’s dependent on both the timing of the cash flow and the interest rate. To figure out the value, the present value of each individual cash flow must be found. Then, you’ll simply add the cash flows together.
(Image source: Wikipedia)
- F = face values
- iF = contractual interest rate
- C = F * iF = coupon payment (periodic interest payment)
- N = number of payments
- i = market interest rate, or required yield, or observed / appropriate yield to maturity
- M = value at maturity, usually equals face value
- P = market price of bond
Bond Valuation Calculators
There are many tools available online to help you calculate a bond’s valuation, without having to do that crazy math computation on your own! Here are some popular ones:
There’s a lot to learn about bond valuation. It’s important to be able to understand the fair price of a bond before investing in it. Selecting an investment that is well suited for you can be a stressful experience. We’ve got you covered. Our Investing in Different Markets course will teach you all about bonds.
THE 3 BEST TOOLS FOR BEGINNER INVESTORS
Updated November 6, 2021: At WallStreetSurvivor, our passion is helping you learn to invest in the stock market the RIGHT WAY! As part of our commitment to you, we are constantly evaluating all types of financial tools from stock picking newsletters to brokerage apps to stock screeners and more. Here are our favorites:
1. BEST SOURCE OF STOCK PICKS FOR THE LAST 5 YEARS
We have been tracking ALL of the Motley Fool stock picks since January 2016. That's over 5 years and 120 stock picks. Take a look at their stock picks' performance for the last 5 years:
- Average return of their 120 picks from 2016 to 2020 is 233%
- That beats the SP500's 88%
- 84% of their picks are up
- 57 of those 120 stocks have doubled
Now, no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super profitable as you can see. They do pick some losers, but the key for investors is to invest equal dollar amounts in all of their picks. So if you have $1,000 to invest in the market each month, buy $500 of each of their 2 monthly stock picks.
Normally the Motley Fool service is $199 per year but they are currently offering it at their lowest price ever: Just $79 for 12 months..
CLICK HERE to get the next Motley Fool Stock Pick
2. BEST STOCK BROKERAGE ACCOUNT
Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering one free share of stock (value up to $250) when you open a new account. In addition, they will give you another free share of stock (up to $250) for each friend that you refer, max 3 friends a year.
Here's the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $250. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $250.
3. FIVE STOCKS LIKELY TO DOUBLE
ZACKS Investment Research just released their list of 5 Stocks Likely to Double. ZACKS has been around since 1978 and their top rated stocks have an average gain of 25.35% per year over the last 30+ years. Best of all, you can get this list of 5 stocks for FREE by CLICKING HERE.
BEST STOCK NEWSLETTER: The Motley Fool Stock Advisor has won our award for the Best Stock Newsletter 4 years in a row with average stock pick up 233% since 2016. New Subscribers can try the service now for just $19.