# How do I determine the fair value of a security? (with photo)

To determine the fair value of a security, the following variables are typically needed: time to maturity, discount rate, coupon rate, and par value.

The most common method of determining a security’s fair value is to calculate the present value of all expected future cash flows from the security. To do this, you typically need the following variables: time to maturity, discount rate, coupon rate, and face value. Essentially, time to maturity is the period of time until the bond issuer returns the money owed to the bondholder at par, which is typically a round number. The discount rate is generally the rate of return that an investor expects to receive if the bond is held to maturity, which is commonly referred to as the yield in the bond market. Finally, the coupon rate is basically the normal interest rate paid to the bondholder until maturity, when the investor receives the final coupon payment along with the par value.

When purchasing a bond, an investor normally expects to receive a series of cash flows until the bond matures. For example, a bond that has a maturity of three years and pays a coupon of \$100 US dollars (USD) per year would mean that the par value of \$1,000 USD is returned to the bondholder at the end of three years along with with the last installment of the coupon. This means that the bondholder will receive three separate cash flows. That is, the investor will receive \$100 USD in year one, \$100 USD in year two, and the last installment will be \$1,100 USD at the end of year three. To determine the fair price of such a security, it is necessary to calculate the present value of all cash flows using the discount rate and maturity period.