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Business valuation

Debt valuation

5.1 Introduction

The value of the debt in a company is often quite easy to determine, and not as
subjective as the value of equity. For example, a bank loan is not traded so its value
doesn't fluctuate. However, traded debt (such as bonds) will have a fluctuating value
so it is important that we can calculate a theoretical value for such debt.

5.2 Basic debt valuation model

Theory: The value of a bond is the present value of the expected future
receipts to the investor (e.g. interest payments and redemption value)
discounted at the lenders’ required rate of return.

Exam questions will often expect you to first calculate the lenders’
required rate of return (this was covered in the earlier Chapter 6).

Illustrations and further practice

Now try Illustrations 2, 3 and 4 in Chapter 13

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