LOS 67 Introduction to the Valuation of Debt Securities

LOS 67 Introduction to the Valuation of Debt Securities

a. explain the steps in the bond valuation process;

Steps involved in bond valuation

The fundamental principle of valuation is that the value is equal to the present value of its expected cash flows. The valuation process involves the following three steps:

1. Estimate the expected cash flows.

2. Determine the appropriate interest rate or interest rates that should be used to discount the cash flows.


3. Calculate the present value of the expected cash flows found in step one by using the interest rate or interest rates determined in step two.