Fixed Income Investments - Bond Valuation Basics


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.
Cash Flow


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RELATED TERMS
  1. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
  2. Bond Valuation

    A technique for determining the fair value of a particular bond. ...
  3. Price to Free Cash Flow

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  4. Cash Flow From Financing Activities

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  5. Discounted Cash Flow (DCF)

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  6. Discount Rate

    The interest rate charged to commercial banks and other depository ...
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