what is bond valuation 
bond valuation is a technique for determining the theoretical fair value of a particular bond bond valuation includes calculating the present value of a bond s future interest payments also known as its cash flow and the bond s value upon maturity also known as its face value or par value because a bond s par value and interest payments are fixed an investor uses bond valuation to determine what rate of return is required for a bond investment to be worthwhile understanding bond valuationa bond is a debt instrument that provides a steady income stream to the investor in the form of coupon payments at the maturity date the full face value of the bond is repaid to the bondholder the characteristics of a regular bond include bond valuation in practicesince bonds are an essential part of the capital markets investors and analysts seek to understand how the different features of a bond interact in order to determine its intrinsic value like a stock the value of a bond determines whether it is a suitable investment for a portfolio and hence is an integral step in bond investing bond valuation in effect is calculating the present value of a bond s expected future coupon payments the theoretical fair value of a bond is calculated by discounting the future value of its coupon payments by an appropriate discount rate the discount rate used is the yield to maturity which is the rate of return that an investor will get if they reinvested every coupon payment from the bond at a fixed interest rate until the bond matures it takes into account the price of a bond par value coupon rate and time to maturity the size of the u s municipal bond market or the total amount of debt outstanding at the end of 2018 according to the securities industry and financial markets association sifma an industry group 2coupon bond valuationcalculating the value of a coupon bond factors in the annual or semi annual coupon payment and the par value of the bond the present value of expected cash flows is added to the present value of the face value of the bond as seen in the following formula v coupons c 1 r t v face value f 1 r t where c future cash flows that is coupon payments r discount rate that is yield to maturity f face value of the bond t number of periods t time to maturity begin aligned v text coupons sum frac c 1 r t v text face value frac f 1 r t textbf where c text future cash flows that is coupon payments r text discount rate that is yield to maturity f text face value of the bond t text number of periods t text time to maturity end aligned vcoupons 1 r tc vface value 1 r tf where c future cash flows that is coupon paymentsr discount rate that is yield to maturityf face value of the bondt number of periodst time to maturity for example let s find the value of a corporate bond with an annual interest rate of 5 making semi annual interest payments for 2 years after which the bond matures and the principal must be repaid assume a ytm of 3 therefore the value of the bond is 1 038 54 zero coupon bond valuationa zero coupon bond makes no annual or semi annual coupon payments for the duration of the bond instead it is sold at a deep discount to par when issued the difference between the purchase price and par value is the investor s interest earned on the bond to calculate the value of a zero coupon bond we only need to find the present value of the face value carrying over from the example above the value of a zero coupon bond with a face value of 1 000 ytm of 3 and 2 years to maturity would be 1 000 1 03 2 or 942 59 