Important Points for IC 99 - Asset Management Exam
Page 65 Of 109
Go to:
Bond valuation includes determination of the present value of the bonds future interest payments, also known as its cash flows, plus the bonds maturity value on its maturity, which is also known as its face value or par value.
The valuation process involves the following three steps : i) To estimate the expected cash flows, ii) To determine the appropriate interest rate or interest rates to applied to discount the cash flows, iii) 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.
Bond Value = Present Value (PV) of Interest Payments + Present Value of Principal Payment.
The balance between risk and return varies by the type of bonds, the entity that issues bonds, the state of the economy and the cycle of the securities markets.
Bonds are widely considered to be a safe investment, they are exposed to following major risks : i) Interest rate risk, ii) Inflation risk, iii) Credit risk, iv) Market risk, v) Liquidity risk, vi) Call risk and vii) Event risk
MODELEXAM® 
www.realsoftinfoplan.com