## F.I.

danish.hassan7
Good Student
Posts: 10
Joined: Sat Apr 22, 2017 11:51 am

### F.I.

Q. Please explain with other logic. I can't understand this.

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:
Choose one answer.
a. 3.8%. Correct
b. 3.6%. Incorrect
c. 4.1%. Incorrect
The correct answer is A
3.2% + [(4 - 3) / (6 - 3)] × (5.0% - 3.2%) = 3.8%

edupristine
Finance Junkie
Posts: 964
Joined: Wed Apr 09, 2014 6:28 am

### Re: F.I.

From the basics of Fixed Income we know that the YTM of a 4 year bond would lie between the 3 year bond (3.2%) and 6 year bond (5%). Matrix pricing ignores convexity and assumes equal increase in yields with tenor. For an increase in 3 years the higher YTM obtained is 1.8% which equates to 0.6% per year. Hence for 4 year bond the YTM is 3.2% (of 3 year) + 0.6% of one year = 3.8%

Return to “CFA Level I”

## Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.