Question

An analyst wants to estimate the yield to maturity on a non-traded 4-year, annual pay bond rated A. Among actively traded bonds with the same rating, 3-year bonds are yielding 3.2% and 6-year bonds are yielding 5.0%. Using matrix pricing the analyst should estimate a YTM for the non-traded bond that is closest to:

Answer 1

3.8%

Step-by-step explanation:

3 year bonds yielding 3.2%

6 year bonds yielding 5.0

Annual pay bond 4 years

Yielding bond+[(Annual pay bond- Bonds years)/bond years]×(Yielding bond-Yeilding bonds)

Let plug in the formula

Interpolating: 3.2% + [(4 - 3) / (6 - 3)] × (5.0% - 3.2%)

=3.2%+[1/3×(1.8%)]

= 3.2%+(0.33333×1.8%)

=3.2%+0.006

=0.032+0.006

=0.038×100

=3.8%

Alternatively,

Interpolating: 3.2% + [(4 - 3) / (6 - 3)] × (5.0% - 3.2%) =3.8%

In this case the analyst should estimate a YTM for the non-traded bond that is closest to: 3.8%