Debt Market Value

Debt Market Value is the market price of company debt (bond) that is traded in the capital market. It is the amount that investor need to pay to acquire the debt instrument from the market. The investors paid cash to purchase the debt instrument from the market. The purchase price is the agreed amount between buyer and seller.

Debt market value is usually different from the company’s book value on balance sheet due to various reasons. The book value of debt will present the company obligation to pay back to investors on the maturity date. The company has to pay back the debt based on the par value of the agreement. Some investors are not able to wait until maturity and they need the money early. So they go to the market and sell the debt to others, for sure the value will be lower than the par value.

The company issue bonds to the public trade market, so they will trade base on the seller and buyer’s agreed price. The market price will change due to demand and supply.  But the company still keeps the same record on its balance sheet unless the debts are paid.

However, not all debts are publicly traded. For example, loans from banks or creditors will not trade in the market, so there is no market value for such type of debt. There will be some differences between a company’s market debt and book value because not all debts are public trade.

If we review the company’s financial statement, we will see only the debt book value that is presented on the balance sheet. While the market value is the company’s debt real value which is not recorded, but it can be calculated.

Debt Market Value Formula

The market value of public trade debit is simply the current market price at the reporting date or any specific date. However, if we want to convert the nontrading debt, we have to use the following formula, as they do not have a market price.

\[Market \space Value \space of \space Debt = C \times {1 – {1 \over{(1+Kd)^t}} \over {Kd}} + {FV \over{(1+Kd)^t}}\]

  • C: Interest Expense
  • Kd: the cost of debt
  • FV: Total debt amount
  • t: weight average maturity

Debt Market Value Example

Company ABC borrows a loan of $ 1,000,000 from the bank for 5 years. As it is the none trade debt, so there is no market value available. If we want to get market value, we need to use the above formula. Please refer to the following detail below:

  • Interest expense: $ 30,000
  • Cost of debt: 5%
  • Total amount: $ 1,000,000
  • Maturity date: 5 years

Please calculate the market value of the bank loan.

\[Market \space Value \space of \space Debt = 30,000 \times {1 – {1 \over{(1+5\%)^5}} \over {5\%}} + {1,000,000 \over{(1+5\%)^5}}\]

Market Value of Debt = $ 913,410

This is the market value of the loan which company borrows from the bank. It will not impact the company recording as they will use the original balance to record into the financial statement.

Journal Entry

The company still uses the loan principle to record into balance sheet, not the market value. The journal entry should be debiting cash and crediting loans.

Account Debit Credit
Cash 1,000,000
Loan 1,000,000

It will increase the company cash as well as the company obligation which is known as debt in the balance sheet.

Factors Influence Debt Market Value

Factor Explanation
Interest Rate Investors purchase company debt to gain more return. The bond interest rate will be fixed as of the issued date while the market rate fluctuates. If the market rate drop below the bond rate, more investors will go purchase bonds and it will drive the price up. On the other hand, if the market rate increases, bondholders will sell the bond so it will decrease the price.
Inflation Inflation is the decrease of one currency’s purchasing power over time. When inflation increase, the bond price will decrease. It means that the money that investors expect to receive on the maturity date will have lower purchase power. The increasing of inflation devalues the return from bonds and vice versa.
Credit Rating Credit rating is the tool that measures company’s ability to pay back both interest and principle. A higher rating means the company is doing good and being able to pay back, so the risk for investors is very low. Many investors will interest in the bonds, so it will increase the price.

On the other hand, if the rating fall, the bond will become a high-risk instrument. Everyone wants to get rid of them, so the supply will increase and cause the price to fall.

Bond Aging As the bond aging gets older, the market value will move closer to the par value. Current bondholders already receive most of the full face value.

Important of Debt Market Value

  • Calculate the real cost of capital: It is more suitable to use the market value to come up with the real cost of capital. Relying on the company’s book value to calculate the cost of capital will not reflect the market condition which is the real value.
  • Management can use the information to access the future financing plan. For example, they set a proper bond premium or discount that reflects the market and investors.
  • Investors will use the debt market value to evaluate the company’s net worth.
  • The company can use this formula to calculate the market value of the debt such as a loan or debt from a creditor. They can use the value to compare with the market value of debt in the capital market. It allows the company to obtain the debt which lowers cost.

Debt Market Value Vs Debt Book Value

Debt market value is the value of a company’s debt that is trading in the market.

Debt book value is the value of debt which record on the company’s financial statements.

Debt Market Value Debt Book Value
Reflect on the market: As it is the price which investors will pay so it is more reliable. Reflect on company payback: It is the contractual obligation which investors expect to receive from the issuer.
Subject to Change: The market price will change frequently based on supply & demand. Fixed: book value is a fixed value that the company will pay in the future.
Only found in the market: We need to access the market to get the value and is subject to change over time. Can be found on the balance sheet: We can find this value on the balance sheet or note to the financial statement.