Valuation of bonds and debentures, Finance Basics

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Valuation of Bonds and Debentures

It will depend on expected cash flows consisting of annual interest in additional the principal amount to be obtained at maturity.  The suitable rate of capitalization or discount rate to be applied will depend upon the riskiness of the bond as like government bonds are less risky and will hence call for lower discount rates than same like bonds issued via private companies that will call for high rate of discount.

Valuation of bonds with maturity period

Whenever a bond or debenture has reached maturity, so its value can be determined through considering annual interest payments in addition its terminal or maturity and this is complete via using the P.V. concept to discount the cash flows and the conclusion will be compared to the market value of the bond to ascertain whether it has undervalued or overvalued.

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Where like: Int   = Annual interest

                   Kd = necessary rate of return

                   M   = Terminal/maturity value

                   n   = Number of years to maturity


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