What is 'Bond Valuation'

Bond valuation is a technique for determining the fair value of a particular bond. Bond valuation includes calculating the present value of the 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 an investment in a particular bond to be worthwhile.

BREAKING DOWN 'Bond Valuation'

Bond valuation is only one of the factors investors consider in determining whether to invest in a particular bond. Other important considerations are: the issuing company's creditworthiness, which determines whether a bond is investment-grade or junk; the bond's price appreciation potential, as determined by the issuing company's growth prospects; and prevailing market interest rates and whether they are projected to go up or down in the future.

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RELATED FAQS
  1. What determines the price of a bond in the open market?

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  2. Will the price of a premium bond be higher or lower than its par value?

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  3. How does face value differ from the price of a bond?

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  4. Should investors focus more on the current yield or face value of a bond?

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