Valuation is corporate finance's core skill — estimating what an asset is worth. Bonds and stocks are valued using the same underlying idea: the present value of future cash flows. Here is the master guide.
Bond Valuation
Price = the present value of all future coupon payments plus the return of principal, discounted at the required yield. When yields rise, bond prices fall — and vice versa.
Stock Valuation
Stocks are valued on expected future earnings/cash flows — via discounted cash flow (DCF), dividend discount models, or relative multiples (P/E, EV/EBITDA). Growth and risk drive the discount rate.
Core Principles
- Time value of money: future money is worth less.
- Risk-adjusted discounting: riskier cash flows demand higher returns.
- Growth assumptions drive value sensitivity.
Why It Matters
Valuation separates price from worth — the gap is where opportunities and risks appear.
FAQ
Which valuation method is best?
Use multiple: DCF for fundamentals, multiples for market comparison.
Why do valuations differ from prices?
Prices reflect sentiment and supply/demand; valuations aim at intrinsic worth.
Related: Financial Statements and Bond Yields.