Valuation : Question 5
How do you calculate the market value of a debt?

The market value of a debt is calculated on the basis of the interest rate schedule and the outstanding capital and on the discount rate the investor is entitled to expect given the level of risk on this debt.

To do this, take the yield curve to find the yield that is equal to the debt to be valued. You need to add in a margin to account for the risk differential between the yield curve (often the same as government bonds) and the risk of the debt to be valued. This margin is often calculated by the rating agencies (Moody’s, Standard & Poor’s).

For more information, see chapter 21 of the Vernimmen.