diff --git a/rllib/BUILD.bazel b/rllib/BUILD.bazel
index 347e9ea7f4a2..a8d53f4e832a 100644
--- a/rllib/BUILD.bazel
+++ b/rllib/BUILD.bazel
@@ -1810,6 +1810,16 @@ py_test(
     deps = [":conftest"],
 )
 
+py_test(
+    name = "test_ppo_value_bootstrapping",
+    size = "medium",
+    srcs = ["algorithms/ppo/tests/test_ppo_value_bootstrapping.py"],
+    tags = [
+        "algorithms_dir",
+        "team:rllib",
+    ],
+)
+
 # SAC
 py_test(
     name = "test_sac",
diff --git a/rllib/algorithms/ppo/tests/test_ppo_value_bootstrapping.py b/rllib/algorithms/ppo/tests/test_ppo_value_bootstrapping.py
new file mode 100644
index 000000000000..8267119e5b7c
--- /dev/null
+++ b/rllib/algorithms/ppo/tests/test_ppo_value_bootstrapping.py
@@ -0,0 +1,185 @@
+import unittest
+
+import numpy as np
+import torch
+
+import ray
+import ray.rllib.algorithms.ppo as ppo
+from ray.rllib.connectors.env_to_module import FlattenObservations
+from ray.rllib.connectors.learner import (
+    AddColumnsFromEpisodesToTrainBatch,
+    AddOneTsToEpisodesAndTruncate,
+    BatchIndividualItems,
+    LearnerConnectorPipeline,
+)
+from ray.rllib.core.columns import Columns
+from ray.rllib.env.single_agent_episode import SingleAgentEpisode
+from ray.rllib.policy.sample_batch import DEFAULT_POLICY_ID
+from ray.rllib.utils.metrics import ENV_RUNNER_RESULTS, EPISODE_RETURN_MEAN
+from ray.rllib.utils.postprocessing.value_predictions import compute_value_targets
+from ray.rllib.utils.postprocessing.zero_padding import unpad_data_if_necessary
+
+
+def simulate_vt_calculation(vfps, rewards, terminateds, truncateds, gamma, lambda_):
+    # Formatting
+    episodes = []
+    for vfp, r, term, trunc in zip(vfps, rewards, terminateds, truncateds):
+        episodes.append(
+            SingleAgentEpisode(
+                observations=[0] * len(vfp),  # Include observation after last action
+                actions=[0] * len(r),
+                rewards=r,
+                terminated=term,
+                truncated=trunc,
+                len_lookback_buffer=0,
+            )
+        )
+    # Call AddOneTsToEpisodesAndTruncate
+    pipe = LearnerConnectorPipeline(
+        connectors=[
+            AddOneTsToEpisodesAndTruncate(),
+            AddColumnsFromEpisodesToTrainBatch(),
+            BatchIndividualItems(),
+        ]
+    )
+    batch = pipe(
+        episodes=episodes,
+        batch={},
+        rl_module=None,
+        explore=False,
+        shared_data={},
+    )
+    episode_lens = [len(e) for e in episodes]
+    # Add the last episode's terminated/truncated flags to `terminateds` and `truncateds`
+    vfps = [v for vfpl in vfps for v in vfpl]
+    # Compute the value targets
+    return compute_value_targets(
+        values=vfps,
+        rewards=unpad_data_if_necessary(
+            episode_lens,
+            np.array(batch[Columns.REWARDS]),
+        ),
+        terminateds=unpad_data_if_necessary(
+            episode_lens,
+            np.array(batch[Columns.TERMINATEDS]),
+        ),
+        truncateds=unpad_data_if_necessary(
+            episode_lens,
+            np.array(batch[Columns.TRUNCATEDS]),
+        ),
+        gamma=gamma,
+        lambda_=lambda_,
+    )
+
+
+class TestPPO(unittest.TestCase):
+    @classmethod
+    def setUpClass(cls):
+        ray.init()
+
+    @classmethod
+    def tearDownClass(cls):
+        ray.shutdown()
+
+    def test_value_computation(self):
+        correct = [0.9405, 1.0, None, 0.9405, 1.0, None]
+        two_term = simulate_vt_calculation(
+            [[0.0, 0.95, 0.95], [0.0, 0.95, 0.95]],  # Value head outputs
+            [[0.0, 1.0], [0.0, 1.0]],  # Environment rewards
+            [True, True],  # Terminated flags
+            [False, False],  # Truncated flags
+            gamma=0.99,
+            lambda_=0.0,
+        )
+        for pred, gt in zip(two_term, correct):
+            if gt is not None:
+                self.assertAlmostEqual(pred, gt)
+        # Test case where an episode is truncated (state value should be included)
+        correct = [0.9405, 1.0, None, 0.9405, 1.9405, None]
+        term_trunc = simulate_vt_calculation(
+            [[0.0, 0.95, 0.95], [0.0, 0.95, 0.95]],  # Value head outputs
+            [[0.0, 1.0], [0.0, 1.0]],  # Environment rewards
+            [True, False],  # Terminated flags
+            [False, True],  # Truncated flags
+            gamma=0.99,
+            lambda_=0.0,
+        )
+        for pred, gt in zip(term_trunc, correct):
+            if gt is not None:
+                self.assertAlmostEqual(pred, gt)
+
+    def test_ppo_value_bootstrapping(self):
+        """Test whether PPO's value bootstrapping works properly."""
+
+        # Build a PPOConfig object with the `SingleAgentEnvRunner` class.
+        config = (
+            ppo.PPOConfig()
+            .debugging(seed=0)
+            .environment(  # A very simple environment with a terminal reward
+                "FrozenLake-v1",
+                env_config={
+                    "desc": [
+                        "HG",
+                        "FF",
+                        "SH",
+                        "FH",
+                    ],
+                    "is_slippery": False,
+                    "max_episode_steps": 3,
+                },
+            )
+            .env_runners(
+                num_env_runners=0,
+                # Flatten discrete observations (into one-hot vectors).
+                env_to_module_connector=lambda env, spaces, device: FlattenObservations(),
+            )
+            .training(
+                num_epochs=10,
+                lr=2e-4,
+                lambda_=0.0,  # Zero means pure value bootstrapping
+                gamma=0.9,
+                train_batch_size=256,
+            )
+        )
+
+        num_iterations = 20
+
+        algo = config.build()
+
+        for i in range(num_iterations):
+            r_mean = algo.train()[ENV_RUNNER_RESULTS][EPISODE_RETURN_MEAN]
+            print(r_mean)
+
+        # Test value predictions
+        critic = algo.learner_group._learner._module[DEFAULT_POLICY_ID]
+        state_values = {}
+
+        for state in [3, 2, 4, 6]:
+            obs = torch.zeros((8,)).float()
+            obs[state] += 1
+            batch = {Columns.OBS: obs.unsqueeze(0)}
+            with torch.no_grad():
+                value = critic.compute_values(batch).item()
+            print(f"State {state}: {value:.02f}")
+            state_values[state] = value
+
+        algo.stop()
+        # Value bootstrapping should learn this simple environment reliably
+        self.assertGreater(r_mean, 0.9)
+        # The value function
+        self.assertGreater(state_values[3], 0.9)  # Immediately terminates with reward 1
+        self.assertGreater(
+            state_values[2], 0.8
+        )  # One step from terminating with reward 1
+        self.assertGreater(
+            state_values[4], 0.7
+        )  # Two steps from terminating with reward 1
+        self.assertLess(state_values[6], 0.7)  # Cannot reach the goal from this state
+
+
+if __name__ == "__main__":
+    import sys
+
+    import pytest
+
+    sys.exit(pytest.main(["-v", __file__]))
diff --git a/rllib/connectors/learner/add_one_ts_to_episodes_and_truncate.py b/rllib/connectors/learner/add_one_ts_to_episodes_and_truncate.py
index fcd3703eeb85..0719b81cd3a9 100644
--- a/rllib/connectors/learner/add_one_ts_to_episodes_and_truncate.py
+++ b/rllib/connectors/learner/add_one_ts_to_episodes_and_truncate.py
@@ -146,12 +146,11 @@ def __call__(
                 len_ + 1,
                 sa_episode,
             )
-
-            terminateds = (
-                [False for _ in range(len_ - 1)]
-                + [bool(sa_episode.is_terminated)]
-                + [True]  # extra timestep
-            )
+            terminateds = [
+                False for _ in range(len_)
+            ] + [  # Avoid ignoring last-step rewards when lambda=0
+                bool(sa_episode.is_terminated)
+            ]  # Use computed value for truncated eps.  # extra timestep
             self.add_n_batch_items(
                 batch,
                 Columns.TERMINATEDS,