Larry Levine (McGladrey)outlined the key valuation drivers for a fixed income security
in his session “Valuing Illiquid Financial Securities” last week at the ASA/CICBV Business Valuation Conference.
- Forecast of coupon payment –fixed or floating rate
- Consider financial impact of embedded options:
- right to prepay, right to call
- right to convert into another security
- interest rate floors or ceilings
- Assess impact of credit risk –risk and monetary impact of potential default
- Time to maturity
- Discount rate –required market derived yield for a security given its creditworthiness
“One of the biggest challenges is the discount rate, Levine said. “With a large public company you can find the discount rate on Capital IQ. But for private companies there isn’t a similar database.”
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