The basic principle of bond valuation is discounted cash flow
1. Determination of bond cash flow
1. The face value and coupon rate of the bond
2. Interest calculation interval
3. Embedded option provisions of bonds
Generally speaking, any terms that are beneficial to the issuer will correspondingly reduce the value of the bond; conversely, any terms that are beneficial to the holder will increase the value of the bond.
4.Tax treatment of bonds
Tax-exempt bonds (such as government bonds) are worth more than comparable taxable bonds (such as corporate bonds, asset-backed securities, etc.) .
The interest rate type of the bond (floating interest rate, fixed interest rate), the currency of the bond (single currency, dual currency bond) and other factors will affect the cash flow of the bond.
5. Other factors
2. Determination of bond discount rate
The discount rate of a bond is the minimum rate of return required by investors on the bond , also known as the required rate of return
Required rate of return on bonds = real risk-free rate of return + expected inflation rate + risk premium
The real risk-free rate of return is theoretically determined by the average rate of return on social capital
Expected inflation rate estimates future inflation rates
Risk premium is the compensation investors receive for bearing investment risk
3. Bond quotations and actual paid prices
Bond buying and selling quotations are divided into net price and full price , and settlement is full price settlement.
Full price = net price + accrued interest
Net price refers to the bond price excluding accrued interest , and the unit is "yuan/hundred yuan face value"
Accrued interest is the accumulated interest payable by the bond issuer to the bond holder based on the face value of 100 yuan between the last interest payment date (or interest value date) and the settlement date.
4. Bond Valuation Model
1. Zero-coupon bond pricing
2. Coupon-bearing bond pricing
A coupon bond can be thought of as a portfolio of zero-coupon bonds . Therefore, you can use the zero-coupon bond pricing formula to price each bond separately, and the sum is the theoretical price of the coupon bond; you can also directly apply the cash flow discount formula for pricing.
3. Pricing of interest-accumulating bonds
Unlike interest-bearing bonds, interest-bearing bonds also have coupon rates, but require one-time repayment of principal and interest upon maturity . It can be regarded as a zero-coupon bond with a face value equal to the principal and interest payment at maturity , and is priced according to the zero-coupon bond pricing formula.
