Ask Question
10 September, 19:01

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:

+1
Answers (1)
  1. 10 September, 22:58
    0
    3.8%

    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%
Know the Answer?
Not Sure About the Answer?
Get an answer to your 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 ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers