Bond Valuation: Definition, Types and Value Determining Factors

The process and technique used for determining the real and future value of a bond is called bond valuation. More specifically, it’s the cash amount that one bond promises to bring in or generate within a given point of time. However, bond buyers get an interest amount which is termed as cash flow and the amount it makes at the time of maturity is called face value. There is a discount amount that comes into the picture. By discounting the cash amount a bond generates at the time of maturity is what one must consider while Bond Valuation process. Either by adding or by subtracting option pricing to a bond, the real valued can be easily estimated.

Kinds Of Bonds –

One gets variety of bonds in the market. First one is discount bond.  It promises to pay off the face value only at the time of maturity. Second is console bond. It has no fixed maturity date and pays off at regular periodic basis. Third is level coupon is one that pays off all maturity face value and even pays at the periodic intervals. Fourth, it’s called callable bond that allows the owner to buy his or her bond easily at specific time period. On the other hand the last one convertible one which allows the owners exchange their bond for any available bond value.

What determines the pricing?

The value of bond is determined only on one factor and this is the investment value of it. However, other factors that really play an important role are company’s credit history and growth rate and the appreciation value. However, investors check out market rates too. Once these tasks are done, financiers check out if bonds can bring in an expected and satisfactory value or not.