Date posted: 25/11/2020

Valuing financial instruments

The CA ANZ Business Valuation conference was fortunate to leverage the expertise of PwC’s Siobhan Hall CA, Business Valuation Specialist, on valuation methods for financial instruments.

In brief

  • Siobhan Hall CA was a key presenter at the 2020 CA ANZ Business Valuation conference
  • Her presentation focused on the specialised field of valuing financial instruments
  • The key messages from her interactive presentation are summarised in this article, and other content from the conference is available to purchase online

The valuation of financial instruments is a highly specialised area of business valuation. The CA ANZ Business Valuation conference was fortunate to leverage the deep expertise of PwC Director Siobhan Hall CA on this topic.

Hall began her presentation by explaining that debt instruments are valued using a discounted cash flow approach. Their fair value is calculated as the contracted principal and interest cash flows of the debt – discounted at a market yield. 

Quantifying and valuing debt

Hall set out the key terms for valuing debt, including:

  • interest/coupon payments – made as the cost of receiving debt financing
  • amortisation – the reduction in face value of debt over time
  • principal/face value – the amount of debt outstanding
  • discount or premium to par – the ratio of valuation to the face value of the debt, used to benchmark relative value
  • market yield – the discount rate to value of the debt – the interest rate that would be charged for the debt if it was issued today.

She outlined the numerous ways to quantify debt by benchmarking market yield. This can be against the company's other debt instruments, trade debt, yield implied from pricing of composite indices, or the implied yield at inception, rolled forward for changes in the market.
Hall also reminded participants that debt must be adjusted for time-to-repayment, credit quality, how the debt ranks relative to other debts, and liquidity.

Siobhan Hall reminded participants that debt must be adjusted for time to repayment, credit quality, how the debt ranks relative to other debts, and its liquidity. 

Practical lessons

The session also included a workshop in breakout rooms where participants assessed debt ­– considering the complex impacts of COVID-19 and the importance of using more than one benchmark to value an instrument in uncertain times.

Understanding derivatives and hybrid instruments

The session also included a focus on derivatives – financial securities whose value relies on or is derived from fluctuations in an underlying asset or group of assets (a benchmark). This included a quiz on various derivative products, including forward contracts, future contracts, swaps and options.
Next, Hall discussed hybrid securities (single financial securities combining two or more different financial instruments, that generally have both debt and equity characteristics.
Because IFRS 9 requires valuers to think about fair value (either valuing the components separately or recognising the whole instrument), the session looked at how to determine fair value, followed by a workshop where participants looked at how to value a hybrid valuation.

Access Business Valuation conference recordings online

This article highlights the key messages from this practical interactive session.  Due to the interactive nature of the session, we are not able to offer it as a webinar for members who missed the live conference.  However, the lecture-style presentations from the Business Valuation conference are now available online as a recorded webinar, including Aswath Damodaran's keynote address.

Find out moreFind out more

Wisdom of the Jedi: Professor Aswath Damodaran

Professor Aswath Damodaran was keynote presenter at the 2020 CA ANZ Business Valuation conference.

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