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- The basis principle of valuation process is to find the Present Value (PV) of all cash flows that are possible for that particular asset.
- The valuation of a financial asset involves the three steps: (i) Estimate the expected cash flow, (ii) Determine the appropriate discounting rate to discount the expected cash flow, and (iii) Calculate the PV of the expected cash flows and find the total of PVs of different cash flows.
- For a bond, the relationship between the price and the required yield is opposite.
- To calculate the semi-annual coupon payment their in the need to divide the annual coupon payment and discounting rate by 2.
- The price of the bond without the accrued interest is know as clean price.
- Under traditional approach of valuation for discounting all cash flows single interest rate (discount rate) is used to discount all cash flows.