How to determine the value of financial instruments
Financial instrument valuing is very important in today’s day and age. They enable businesses and individuals to help manage risks, invest capital, and access credit.
Given the significant value of financial instruments, it is important to determine their right value; this can be done by engaging a reliable accounting service in Malaysia.
If you are a trader or an investor, knowing the right value of financial instruments can help you maximize returns and better invest in instruments that are profitable.
What are financial instruments?
Any asset that can be traded, sold or simply transferred in the financial market can be termed a financial instrument. They act as a legal agreement between two parties and typically involve the exchange of cash with a clause for the payback of a specific amount with interest.
Various factors that affect the value of financial instruments
1. Market conditions
The financial market’s overall condition can impact the financial instruments’ value.
2. Interest rates
Interest can affect the value of financial instruments, especially bonds. When the interest rate goes up, the existing bond value with lower interest rates also falls.
3. Credit ratings
The credit ratings of companies, municipalities and even entire countries can impact the value of financial instruments issued by these entities. The value of the financial instrument can also go down if the credit rating is flawed.
4. Supply and Demand
The simple economic rule of supply and demand is also crucial to determining the financial instrument’s value.
When we take the market scenario into consideration, any instrument that is in lesser supply with higher demand will see a rise in pricing.
Similarly, any instrument with a lower demand but a higher supply will be cheaper.
5. Political and Economic scenarios
Political and economic events like elections, changes in government policies, and economic trends can all impact the financial instruments’ valuation.
What are the various methods that can be used to value financial instruments?
a. Market Value Method
Considered one of the most frequently used methods to calculate the financial instrument’s value, this method uses the market value. Market value refers to the price at which any given financial instrument can be purchased or sold at a given time in the market.
b. Book Value Method
This method uses book value, which is the value of a financial instrument recorded in the company’s books. This method utilizes historical costs and may not consider the financial instrument’s current market value.
c. Present Value Method
Here the financial instrument value is determined keeping in mind the current value of the expected future cash flows. This includes all the cash that the instrument may generate in the future.
This present value is calculated by discounting the future cash flows, keeping in mind the current value, and using an appropriate discount rate. The discount rate is also considered after taking into account multiple options.
d. Future Value Method
Through this method, a financial instrument’s value is considered, keeping in mind a specified point in the future.
It considers the instrument’s expected growth rate and any interest it is eligible to earn over time. It is imperative to consider all of the factors that may affect the growth of the instrument in the future.
Conclusion
In conclusion, determining financial instrument valuation is crucial to making informed investment decisions. Knowing the right value of the financial instruments can help investors to better evaluate the risks and concerning potential returns for different investments.
Interest rates are one of the most crucial factors determining financial instruments’ value.
The value of the bonds is greatly impacted when the higher rates lead to lower bond prices and vice versa.
A country’s economic and political situation may also affect the final value of the financial instrument. For example, if a country experiences an emergency situation, the value of its financial instruments is bound to fall.
However, if a country is showing promising numbers around its economic growth, this can be a clear sign that the value of financial instruments can go up.
Hence, it is imperative for investors to keep track of the latest developments concerning the financial markets. This can help generate valuable insights into the value of different financial instruments. Accordingly, the right value can be ascertained for maximum gains.
It is recommended for companies and investors to rely on a professional accounting service in Malaysia for the best outcome.
