Lesson 5 of 6 · All lessons in this module
- Pricing a bond with a market discount rateVideo lesson
- Yield-to-maturity: the bond's internal rate of returnVideo lesson
- Between coupon dates: accrued interest, flat and full priceVideo lesson
- How coupon, maturity and yield drive bond pricesVideo lesson
- Matrix pricing for illiquid and new bondsVideo lesson
- Integrated cases: building and reading a pricing matrix
Lesson 5 of 6 · 13 min
Matrix pricing for illiquid and new bonds
When a bond has no recent trade, estimate its yield from comparable bonds that do trade, interpolate to its maturity and discount its cash flows at that yield.
In short
- Most bonds trade rarely, so there is often no current price to compute a YTM from; new issues have no price at all.
- Matrix pricing estimates the price from actively traded comparable bonds with similar maturity, coupon and credit quality.
- Steps: find comparables → compute and average their YTMs by maturity → linearly interpolate to the target maturity → discount the target bond's cash flows at that yield.
- Bond price quotes on data platforms are often matrix-priced estimates, not last trades.
- Underwriters use it to estimate the required yield spread over a government benchmark of similar maturity.
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