VALUATION OF FINANCIAL ASSETS
Valuation is the process of determining the fair value of a financial asset. The process is also referred to as ‘valuing’ or ‘pricing’ a financial asset . The fundamental principle of valuation is that the value of any financial asset is the present value of the expected cash flows .The principle applies regardless of financial asset. Thus, the valuation of financial asset involves the following three steps:
- Estimate the expected cash flows .
- Determine the appropriate interest rate or interest rates that should be used to discount the cash flows; and
- Calculate the present value of the expected cash flows using the interest rates.
