Bond valuation is a method for figuring out an individual bond’s hypothetical fair value. Bond valuation entails figuring out the face value or par value of the bond as well as the present value of the bond’s future interest payments, sometimes referred to as its cash flow or future value. An investor uses bond valuation to calculate what rate of return is necessary for a bond investment to be profitable because the par value and interest payments on a bond are fixed. Finding a bond’s theoretical fair value, also known as par value, is done through bond valuation.
It entails figuring out the bond’s face value as well as the present value of expected future coupon payments, often known as cash flow.
A bond is a type of debt instrument that offers the investor a consistent income stream in the form of coupon payments. The entire bond’s face value is paid back to the bondholder at the bond’s maturity date. Calculating the present value of a bond’s anticipated future coupon payments is the essence of bond valuation. By applying an appropriate discount rate to the future value of a bond’s coupon payments, one can determine the bond’s notional fair value. The yield to maturity, which is the rate of return an investor would receive if they reinvested each bond’s coupon payment at a fixed interest rate until the bond matures, is used as the discount rate.