How to Calculate the Market Value of Debt

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Calculating the market value of a company's total debt requires being able to make an estimate of the potential market value for the portion of a company's debt that is not traded in the bond market. Company financial planners can estimate the total debt market value by converting the company's debt that is not traded in the bond market into a hypothetical coupon bond. Estimated debt market value can be used to determine a company's cost of capital, which influences how much a company will have to pay for any future investments needed to finance growth and support ongoing operations.

Determine the market value for all of the company's debt that is traded in the bond market. Market value of traded debt can be found through various sources, both online and in print. For instance, a company may have both short-term and long-term debt. Assume a company has $40 million in short-term debt and $100 million in long-term debt outstanding. Add the short-term debt of $40 million to the $100 million of long-term debt, and you have a total market value of $140 million in debt that is being traded in the bond market.

Estimate the market value of the company's debt that is not traded in the bond market by converting this debt into a hypothetical coupon bond similar to bonds that are trading in the bond market. Assume the total debt outstanding to be $100 million and the current amount of interest being paid on that debt to be $18 million. Assume the average maturity for all this debt to be five years and the company's current cost of capital to be 7 percent. Proceed to estimate the hypothetical coupon bond as follows: Multiply the $18 million by the quotient of one minus one divided by the 7 percent cost of capital raised to the power of five, and then divide that by 7 percent (18,000,0000 x (1 - 1 / 1.07^5)/.07). Add to this $100 million divided by one plus 7 percent raised to the power of five (100,000,000 / 1.07^5). The net result of this calculation is $78,678,973.

Add the total market value of debt traded in the bond market ($140 million) to the estimated market value of your hypothetical coupon bond ($78,678,973) to arrive at the company's total debt market value of approximately $218 million ($218,678,973).

Warnings

  • Estimating debt market value is not an exact methodology. Be cautious of any estimate that appears to grossly overstate or understate the actual cost of capital.

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About the Author

Pedro Carrasquillo began writing professionally in 2002 while working for the New Jersey state legislature. He coauthored the legislature's annual "Budget Analysis for the Department of Community Affairs" from 2002-07. Carrasquillo holds a Bachelor of Arts in comparative literature from Haverford College as well as a Master of Science in public policy and management from Carnegie Mellon University.