What is Market Value of Debt?
The Market Value of Debt refers to the market price investors would be willing to buy a company’s debt at, which differs from the book value on the balance sheet. A company’s debt doesn’t always come in the form of publicly traded bonds, which have a specified market value. Instead, many companies own debt that can be classified as non-traded, such as bank loans.
Because this debt is reported at book value or accounting value in the financial statements, it is the analysts’ responsibility to calculate the market value, which will be of major importance when calculating the company’s total Enterprise ValueEnterprise ValueEnterprise Value, or Firm Value, is the entire value of a firm equal to its equity value, plus net debt, plus any minority interest, used in valuation. It looks at the entire market value rather than just the equity value, so all ownership interests and asset claims from both debt and equity are included..
To estimate the Market Value of Debt, an analyst can think of the Total DebtCost of DebtThe cost of debt is the return that a company provides to its debtholders and creditors. Cost of debt is used in WACC calculations for valuation analysis. Learn the formula and methods to calculate cost of debt for a company based on yield to maturity, tax rates, credit ratings, interest rates, coupons, and on the books as a single coupon bond, with the coupon being equal to the interest expenses on all debt and the maturity as the weighted average maturity of the debt.
Therefore, our calculated MV of Debt is $573,441.15, which can be later used to calculate the Enterprise Value by adding the Cash and Cash Equivalents to our calculated MV of Debt. This value can then be compared with the market cap and used for the calculation of financial ratios to complete the analyst’s toolbox.
The market value of debt and other fixed income securities is influenced by many factors. It’s important to have a solid understanding of what these factors are, and what impact they have on the value of debt, directionally speaking.
When evaluating the market price of debt, it’s important to take all of the above factors into consideration.