Question

In your own words describe what is bond valuation.

Answer 1

Bond valuation is a method to calculate the intrinsic value (fair value) of Bond. Bond is a fixed interest paying instrument which pays periodic coupons and a maturity value (normally face value of bond) on its maturity.

Value of bond is present value of all future cash flows from bond discounted at required rate (i.e yield to maturity). Bond value is inversely related to yield to maturity which means when yield increases bond values decreases and vice versa.

We can compute Bond Value with following equation:

$V_B= \frac{C_1}{(1+YTM)^1}+ \frac{C_2}{(1+YTM)^2}........ \frac{C_n}{(1+YTM)^n} + \frac{\textup{Face value}}{(1+YTM)^n}$

where,

C = periodic coupon payment

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.