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Postby danish.hassan7 » Fri Jun 09, 2017 7:08 am

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%

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Re: F.I.

Postby edupristine » Tue Jul 18, 2017 9:13 pm

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%

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