EXAMINING THE IMPACT OF DEBT VALUATION METHODOLOGIES AND REPORTING ON INVESTMENT PERFORMANCE

Open Access
Author:
Benoit, Alexander C
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Jiro Yoshida, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
Keywords:
  • Real Estate
  • Debt Valuation
  • Reporting Standards
  • Interest Rate Risk
  • Default Risk
  • Vasicek Model
Abstract:
Real estate is one of the largest investment asset classes in the world and a significant portion of many individuals’ net worth. Although publicly-traded REITs have helped increase liquidity and transparency in the industry, there is still is a need for improvement in reporting and valuation. This dissertation will provide an overview of the current debt valuation and reporting landscape by reviewing the available sources of information and literature. Next, fair value is defined and a framework of how to implement it is provided. The framework is derived mostly from the NCREIF PREA Reporting Standards manual. Finally, the Vasicek model is used to forecast interest rates in order to simulate the value of a loan through time considering interest rate and default risk. The simulation finds that debt valuations can vary significantly depending on the risks considered in the model, specifically in a rising interest rate environment. Additionally, companies with below investment grade ratings see a relatively large decrease in value of their loans compared to those above investment grade.