If you’re trying to get an accurate picture of what a company is worth, you’re going to need to know how to calculate the market value of debt.
Yes, you can use shorthand methods such as referring to the balance sheet figures – and in some cases this is the way to go – but you really want to see what the value of the debt is in the market for the best valuation.
So, how do you go about calculating the market value of a company’s debt, and when should you use this approach?
How to Calculate the Market Value of Debt
To calculate the market value of debt, you’ll need to determine the current worth of a company's outstanding debt based on market conditions. Follow these steps:
Analyze both publicly traded and non-traded debt separately. How you find the market value differs, so you need to split them up for the best assessment.
Determining the market value of publicly traded debt
For publicly traded debt, such as bonds, calculate the market value by multiplying the current market price — often quoted as a percentage of the bond’s face value — by the total number of bonds outstanding.
As an example, a bond with a $1,000 par value trading at 95% is worth $950 per unit (aka per bond).
If they’re trading for $950, and there are 10,000 outstanding, then the market value is $9,500,000.
Determining the market value of non-publicly traded debt
For non-traded debt, such as bank loans, estimate the market value by discounting future cash flows (interest payments and principal) to their present value. Use a current market interest rate, adjusted for the company’s credit risk, as the discount rate.
This rate can be derived from yields on similar-rated bonds or the company’s cost of debt. If you find a good comparison bond – maybe a publicly traded debt instrument that the company has or that a similar company has with a similar balance sheet, coverage ratios, and credit rating – then the bond should already reflect the credit risk and you’re good to go.
Now, discounted cash flow calculations are beyond the scope of this article, but I hope this gives you a good understanding of what you need to do to calculate the market value of the debt.
Why Isn’t the Book Value of a Company’s Debt the Same as its Market Value
The book value of a company’s debt, recorded on the balance sheet, often differs from its market value due to changing economic conditions. In short, the book value is a historic record of the value of the debt but business conditions and company fortunes change, resulting in changing values for debt.
Book value reflects the historical amount borrowed. When a company tries to borrow, for example, $10 million, it records that debt on its balance sheet. Over time, the company may find its business eroding, and its debt to EBITDA ratio shrinking. As a result, investors are less willing to pay full value for those bonds, and the market value of the debt slips.
Similarly, maybe a company floated some bonds during a period of low interest rates, but as rates rose, the market value of its debt shrunk. Remember that the yield on a company’s bonds is compared to the risk free rate (for instance, the Fed Funds Rate). When the risk free rate rises, investors demand a higher yield on the company’s debt. That pushes down the price of the debt in the market – it lowers the market value of the company’s debt. This change can bring the market value of the debt far out of line with the book value of the debt.
How Do You See the Market Price or Value of a Bond?
To see the market price or market value of a bond, you can simply do a search in your broker’s fixed income section once you’re logged in to the platform.
Most brokerages have a fixed income section and search functionality. So, plug the company into the search bar and see what instruments come up. Your broker should also provide you with the CUSIP, which is the unique code given to each financial instrument. With this information, you should be able to identify specific debt instruments.
If you need help, you can refer to the company’s 10K and look for specific information (such as the debt instrument’s interest rate or expiry date) and then compare that with the data that your broker spits out.
If you want to do detailed valuation work on a specific company, don’t just rely on the balance sheet figures by themselves. If the company has a lot of debt, it will likely pay to get a good idea of what the market value of that debt is. This will help you put together much more accurate valuations when looking at things such as liquidations or recapitalization.
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