Larry Levine (McGladrey) outlined the key valuation drivers for a fixed income security yesterday in his session “Valuing Illiquid Financial Securities” at the ASA/CICBV Business Valuation Conference.
- Forecast of coupon payment–fixed or floating rate
- Consider financial impact of embedded options:
- a. right to prepay, right to call
- b. right to convert into another security
- c. interest rate floors or ceilings
4. Time to maturity
5. 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."