I have an interview tomorrow for a real estate investment banking analyst position and I am trying to figure out how to build an NAV Model. What is the simplest way to describe how you find the market value of debt?
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Is this for a Real Estate group? Usually, NAV is calculated using book value of debt. Regardless, there are 2 main ways to get the market value of debt. The quick one (applies to real estate) which serves as a good proxy of the last reported market value of debt is to look at the latest filings and find the mark to market on debt line item and adjust accordingly. The other one would be to track the company's publicly traded debt tranches (Bonds, Debentures etc.) on BBG to check their current price and adjust the book value accordingly.
So how would you calculate that in Excel. Say if market interest rates were 4.4% and the book value interest rates were 5.0%. Would you simply just multiply the amount of debt by 1.06%?
That is not how the public debt market works. The interest rate on bonds is fixed and has nothing to do with the mark to market calculation. The only thing that fluctuates would be the price of the bond. When bonds are issued to public markets they have a face value which is the amount that the company borrows at that point in time and it is the amount upon which interest is calculated as well as the capital value repaid upon maturity (usually 100k tranches). The price of that bond though in public markets can fluctuate. Hence, this bond may trade at 99 in the public markets. In this example, the company would account for a value of 100 borrowed in its accounting books but the market value of that debt would be 99 (1% discount).
Doesn't private debt fluctuate as well? Hence why we follow the 10-year treasury?
And we follow the Libor for lines of credit as well?
Private debt is private hence you cannot just grab a current value quote for it. You follow all PUBLICLY traded debt tranches and use book value for private debt. This is the best estimate of the market value of debt you can get.
I wonder if recruiters ever get on WSO and end up seeing one of their interviewees. It would be so demoralizing if you came in and kkxty was your interviewer.
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