IN this session, I explain bond valuation. Bond valuation is a way to determine the theoretical fair value (or par value) of a particular bond. Bond valuation is the determination of the fair price of a bond. Corporate bond valuation is the process of determining a corporate bond’s fair value based on the present value of the bond’s coupon payments and the repayment of the principal. Farhat Accounting Lectures can help you understand bond valuation, www.farhatlectures.com Are you a CPA candidate or accounting student? Check my website for additional resources such exam questions and notes: Connect with me on LinkedIn: Instagram Account: @farhatlectures Facebook: @accountinglectures Twitter: @farhatlectures Email: Mansour.email@example.com #CPAEXAM #bondvaluation #corporatefinance When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generically called bonds. In this section, we desc BOND FEATURES AND PRICES As we mentioned in our previous chapter. We then discuss the cash flows associated with a bond and how bonds can be valued using our discounted cash flow procedure. For example, suppose the Beck Corporation wants to borrow $ 1,000 for 30 Years. The interest rate on similar debt issued by similar corporations is 12 percent. Beck will thus pay .12 x $ 1,000 = $ 120 in interest every year for 30 years. At the end of 30 years, Beck will repay the $ 1,000. As this example There is, however, a rich jargon associated with bonds, so we will use this example to define some of the more important terms. In our example, the $ 120 regular interest payments t Because the coupon is constant and paid every year, the type of bond we are describing is sometimes called a level coupon bond. The amount that will be repaid at the end of the loan is called As in our example, this par value is usually $ 1,000 for corporate bonds, and a bond that sells for its par value is called a par value bond. Government bonds frequently have much larger face, or par , values. Finally, the annual coupon divided by the face value is called the coupon rate on the bond; in this case, because $ 120/1,000 = 12%, the bond has a 12 percent coupon rate. The number of years until the face A corporate bond will frequently have a maturity of 30 years when it is originally issued, but this varies. Once the bond has been issued, the number of years to maturity declines as time goes by . BOND VALUES AND YIELDS As time passes, interest ra tes change in the marketplace. The cash flows from a bond, however, stay the same. As a result, the value of the bond will fluctuate. When interest rates rise, the present value of the bond’s remaining cash flows declines, and the bond When interest rates fall, the bond is worth more. To determine the value of a bond at a particular point in time, we need to know the number of periods remaining until maturity, the face value, the coupon, and the This interest rate for bonds with similar features. This interest rate required in the market on a bond is called the bond’s yield to maturity (YTM). This rate is sometimes called the bond’s yield for short. Given all this information, we can calculate the present value of the cash flows as an estimate of the bond’s current market value.
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Bond Valuation | Introduction to Corporate Finance | CPA Exam BEC | Chp 7 p 1
finance chapter 6 bond valuation