Monday, November 07, 2011

Bond Valuation Basics

CFA Level 1 - Fixed Income Investments

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.
Determine the appropriate interest rate or interest rates that should be used to discount the cash flows.
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.

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