Five concerns when valuing illiquid securities


Larry Levine (McGladrey) outlined the key valuation drivers for a fixed income security yesterday in his sessionValuing Illiquid Financial Securities” at the ASA/CICBV Business Valuation Conference.

1.  Forecast of coupon payment–fixed or floating rate.

2.  Consider financial impact of embedded options:

  • Right to prepay, right to call;
  • Right to convert into another security; and 
  • Interest rate floors or ceilings.

3.  Assess impact of credit risk–risk and monetary impact of potential default.

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."


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