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Bond valuation is the process by which an investor arrives at an estimate of the theoretical fair value, or intrinsic worth, of a bond.As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate.
Market value or OMV (open market valuation) is the price at which an asset would trade in a competitive auction setting.Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and differ in some circumstances.
Consider a bond with a $1000 face value, 5% coupon rate and 6.5% annual yield, with maturity in 5 years. [26] The steps to compute duration are the following: 1. Estimate the bond value The coupons will be $50 in years 1, 2, 3 and 4. Then, on year 5, the bond will pay coupon and principal, for a total of $1050.
An agent's budget constraint is an equation stating that the total market value of the agent's planned expenditures, including saving for future consumption, must be less than or equal to the total market value of the agent's expected revenue, including sales of financial assets such as bonds or money.
When interest rates increase, the value of existing bonds falls, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rises, since new issues pay a lower yield. This is the fundamental concept of bond market volatility—changes in bond prices are inverse to changes in interest rates.
Interest payments are the primary way bonds generate returns for investors.
In finance, a haircut is the difference between the current market value of an asset and the value ascribed to that asset for purposes of calculating regulatory capital or loan collateral. The amount of the haircut reflects the perceived risk of the asset falling in value in an immediate cash sale or liquidation.
Interest Rate Risk: The risk that level of Yields generally in a bond market, as expressed by Government Bond Yields, may change and thus bring about changes in the market value of Fixed-Coupon bonds so that their Yield to Maturity adjusts to newly appropriate levels. (See DV01, Bond duration and Bond convexity.)