How to Calculate Market Value of Debt

Trying to do this for a public company with a few outstanding bond issues.

Are there data on the price or YTM at which their bonds are trading? If so, it should be straightforward; if not, it should be impossible.

The book value of debt is a reasonable approximation for fixed-rate debt if interest rates and default risk have not significantly changed since the debt issuance. Alternatively, a public company should have it’s cost of debt structure outlined in the 10-K. Treat all outstanding bonds as one bond with a coupon set equal to the interest expenses on all the debt and the maturity set equal to the face-value weighted average maturity of the debt.

Both methods should be good approximations if the bonds aren’t indivudually traded.

^ No. (a) is entirely unrealistic, unless all of the debt was issued within a week or two. (b) WTF? If this is a public company, you should be able to get trading data for their bonds. If you don’t have recent trades (some names don’t trade much), you can look at some peer firms that may trade more often and do some interpolation, but that’s obviously an inexact science. Essentially you would determine a spread between company A and company B on dates where both names traded, and then apply that spread on the last trade of the more frequent trading company. I did this all the time pricing new issues for the last place I worked as we didn’t trade much but many peers did. So if we were typically at 5bps back of Company Z, I’d look at their last trade and have a good idea of where we were sitting for price. Obviously inexact, but it may be all you have.

Right. Presumably the book value shows the coupon rate, and you can back out a YTM or OAS for the bonds when they were issued.

If the bonds are infrequently traded, you look at comparable bonds (in terms of risk and/or ratings) with comparable maturities. Preferably these would be in similar industries or segments, but in a pinch ,you could just look at similar ratings. It would be good to note the high-low or ther spreads, so you get a sense of how off you might be using that kind of data to come up with an average YTM or spread (or alternately, stress test it over the range of YTMS/OASs you come up with ).

That can be your market YTM/OAS, and then you simply back out the current price based on the time to maturity and the change in the current YTM (come to think of it, maybe you don’t need the initial YTM at all, I was thinking duration might come into it at some point, but it doesn’t).

It’s a process with several steps, and it is no doubt somewhat labor intensive, particularly if there are many bonds at different maturities and with different covenants, but it’s not particularly difficult.

It’s not entirely unrealistic. It’s actually a good approximation. We are of course assuming that the company is close to it’s optimal capital structure. Again, if market interest rates and default ratings don’t change significantly.

You sound like an economist. “Now if we hold the entire universe exactly constant, my theory has some limited value at the margin.” Market rates and default risks change all the time. A bond issued a year ago has no relevance to today’s world. Its not at par. A bond issued 10 years ago much less so. The real life applications of (a) are the square root of zero.

It’s not the best way to approximate the market value of debt, but it’s a good approximation. We don’t need exact values, approximations is good enough, and more often than not, the effort and time needed to derive the market values of debt using comparables is of insignificant value compared to the former. A stable company in a stable economy would have the BV of it’s debt a reasonable approximation. This applies to most of the major firms in every developed country.

You are grinding on an issue that I never disagreed with in the first place, it’s not the most accurate, but likely accurate enough.

P.S: I have a BA in ECON.