Question

What are the basic principles in valuing and/or pricing investments, such as stocks and bonds? Generally speaking, what role do interest rates (level maturity, etc.) play in pricing investments?

Answer 1

Bond valuation is a way to determine the theoretical fair value (or par value) of a particular bond. It involves calculating the present value of a bond's expected future coupon payments, or cash flow, and the bond's value upon maturity, or face value. As a bond's par value and interest payments are set, bond valuation helps investors figure out what rate of return would make a bond investment worth the cost.

• Coupon rate (interest rate): Some bonds have an interest rate, also known as the coupon rate, which is paid to bondholders semi-annually. The coupon rate is the fixed return that an investor earns periodically until it matures.
• Maturity date: All bonds have maturity dates, some short-term, others long-term. When a bond matures, the bond issuer repays the investor the full face value of the bond. For corporate bonds, the face value of a bond is usually $1,000 and for government bonds, the face value is $10,000. The face value is not necessarily the invested principal or purchase price of the bond.
• Current Price: Depending on the level of interest rate in the environment, the investor may purchase a bond at par, below par, or above par. For example, if interest rates increase, the value of a bond will decrease since the coupon rate will be lower than the interest rate in the economy. When this occurs, the bond will trade at a discount, that is, below par. However, the bondholder will be paid the full face value of the bond at maturity even though he purchased it for less than the par value.

where: C=future cash flows, that is, coupon payments
r=discount rate, that is, yield to maturity
t=number of periods​

Stock valuation is an important tool that can help you make informed decisions about trading. It is a technique that determines the value of a company's stock by using standard formulas. It values the fair market value of a financial instrument at a particular time. The reason for stock valuation is to predict the future price or potential market prices for the investors to time their sales or purchase of investments.

The stock valuation fundamentals aim to value the “Intrinsic” value of the stock that shows the profitability of the business and its future market value. If you intend to invest in the stock market, you can make use of ratios and methods to evaluate the value of a stock. However, valuation methods are not the only tool to conduct trade, and you should consider other parameters such as history of the company and its trend before trading. It is also prudent to conduct valuations of different ratios and find the average of them to obtain a clear market value of the stock.