los describe matrix pricing

CFA Level I Fixed Income
#1

Hi everyone,

I wanted to be sure that we don’t have to calculate a matrix pricing (“Just” to describe it). Maybe I misread something.

Thanks!

#2

You may be asked to price a bond using matrix pricing, so indeed you will get the inputs and then make the valuation.

#3

Pretty sure you can BS your way through a matrix question if it comes up. Its multiple choice so you can kind of deduce it

#4

ok thx guys!

#5

A hedge fund manager is estimating a value for a non-traded bond of Yoder Company. The bond has an annual-pay 6% coupon, matures in six years, and has a CCC credit rating. Actively traded annual-pay bonds with similar credit ratings include the following:

Coupon Maturity YTM

8% 5 Years 9.45%

5% 5 Years 9.55%

7% 10 Years 10.00%

Based on matrix pricing, the value of the Yoder bond as a percentage of par is closest to:

A. 83.9.

B. 84.1.

C. 84.5.

Guys, can anyone help our with this question?

#6

B has a similar coupon and maturity. Analysis of all three bonds indicates they are comparable on a YTM basis despite their tenor and coupon rates.

if a bond has 10 years to maturity but same YTM as a 5 year bond, their spreads are probably quite different (assuming a normal yield curve) so we can chuck out bond C (we are pricing on spread here)

If we take the structure of B and extend it out a year further, increase the coupon by 1%, but fix the YTM simiar to the three bonds on offer, it would be worth…

#7

IMO, it should be interpolated YTM of 10Y bond with average YTM of both 5Y bonds

Thus:

(9,45+9,55)/2=9,5

then

9,5 % + ((6-5)/(10-5)) x (10 %. - 9,5 %) = 9,6 %.

I/Y 9,6 N 6 FV 100 PMT 6 CPT PV = 84,1

#8

i like your style. listen to flashback

good luck on saturday

#9

Thanks!