Debt Valuation

Market value of debt is directly influenced by the interest or coupon (now on referred to as interest) attached to it. Variations in the interest rates are lead by the market conditions for example changes in base rates. Depending on whether you have provided debt or received debt the changes in interest rates would change market value or commercial value of the debt favourably or adversely. As a first step, a commercial or market rate of interest would need to determined  which is appropriate to the entity in which the debt sits. This in essence would mean the interest rate the entity would have to pay, if it were to obtain new debt in the market from an independent third party (e.g. bank). A good way to do this is to take the 10 year risk free rate on a government bond (say 4.5%) and apply a suitable credit spread on top of this. The sum of the two would be a reasonable estimate of the market interest rate for the entity.

A suitable credit spread would depend on the credit rating of the company or entity in question. A good source for this is the Reuters corporate spreads which are updated daily.

Applying the estimated market interest rate to your exiting interest payments would help you arrive at a market value of your debt. To do this you simply divide your existing annual interest payment £s by the estimated market interest rate %.

Summary of effect:

Investor:  Market interest > Existing interest  =  Adverse (as they are losing out)

Receiver: Market interest > Existing interest = Favourable (as they have a cheap debt)