Homeward Bond: A Simple Discounted Cash Flow (DCF) Model for Bond Valuation

Dinesh Sairam here with (yet another) Excel model. This time, I’m in Debt (Pun intended). I’ve created a Discounted Cash Flow Model for Valuing Debt, that is. The model is named ‘Homeward Bond’.

Here it is (Downloads can be made from File -> Download As):

Highlights of the model:

  1. Extremely simple to use
  2. Option for Valuing in 20 different currencies (Yet to be implemented fully)
  3. Credit Spread is determined using the Rene Stulz formula for Implied Spread.
  4. Embedded Options (If any) are priced using the Schaefer & Schwartz Bond Option Pricing logic.
  5. Three different discounting rate options are present: Required Rate (Schaefer & Schwartz), Risk-free Rate and Opportunity Cost (Custom Rate)

Ironically, the Indian Debt Market isn’t all that complex. A quick look at the daily bond trading data should tell you that most of them are plain vanilla securities with almost no room for under-valuation. I hope in time that India’s Debt Market will evolve and this model becomes marginally more useful.

I request investors who have dabbled in Debt securities enough to use the model and provide constructive feedback. The model definitely requires some improvements and your opinions will go a long way.

PS. If you didn’t catch the pun in the name of the model, here, enjoy some quality music:


How would you value Indigrid Invt type of security ? I am not able to understand should it be valued as Equity or Debt.

currently its yielding 13% coupons are returned as dividend and management forecasting 3-5% growth in yield . i.e,Rs 12 this year then 3% of 12 next year one can expect.
Total life of this asset is 36 year, then i don’t know what doing to happen, I guess the initial investment made will not come be returned.

Let me know your thoughts on it.

Hi Amit,

From what’s described here:

It looks like this is more Equity than Debt. Debt is characterized by pre determined and fixed cash flows. However, the cash flows from Indigrid Invt is not promised as such.

Also, if I’m not wrong, the Investment doesn’t have a redemption date, which is yet another requirement for it being a Debt.

1 Like

Great points Dinesh. Can’t agree more with your analysis on equity vs debt classification.

Non-availability of redemption option (for investors) is a strong argument for equity treatment (although not conclusive by itself)


1 Like