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.”