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Under this approach of Valuation, all cash flows are discounted using single interest rate (discount rate). For example: Consider the 5-year (7.00 percent) Treasury Security (maturing in 2010). Under this approach, all cash flows of this bond will be discounted by the same discount rate to calculate the present value of the cash flow. The discount rate used is the yield for the on-the-run issue obtained from the Treasury yield curve. For example, assume that yield for 7-year Treasury bill is 9%. Then, the practice is to discount each cash flow of each bond using a discount rate of 9%.
In the case of non-Treasury securities, a premium or yield is added to the on-the-run Treasury yield. For example, assume that non-treasury securities the appropriate yield spread is 175 basis points. In such a case, all cash flows will be discounted at the yield for the on-the-run 7-year Treasury bill issue of 9% plus 175 basis points.
On-the-Run Issue is the most recent issue of a security. As an issue ages its liquidity decreases and the spread tends to widen.
Expalin about the Non-Convertible Debentures (NCDs) NCDs are plain debenture securities issued by corporations. They are normally medium term in nature, maturing between 1 to 8
Under treasuries, there exist different types of securities like treasury bills, treasury notes, treasury bonds, inflation protection securities
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