Lesson 6 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 6 of 6 · 15 min
Integrated cases: building and reading a pricing matrix
A matrix-pricing case is won before any calculation: only actively traded bonds of similar credit quality, bracketing the target's maturity, enter the grid; then you average yields by maturity, interpolate, and only at the end discount the target's own coupons.
In short
- Screen the candidate list first. A bond joins the grid only if it has similar credit quality, trades actively and sits at a maturity that helps bracket the target. Everything else is noise.
- Compute each comparable's YTM from its price (for semiannual coupons the calculator's periodic rate is doubled), then average the yields within each maturity row.
- Interpolate yields, never prices: the target sits (target − short) ÷ (long − short) of the way from the shorter row to the longer one.
- Only then discount the target's own coupons at the interpolated yield. For a new issue, express the answer as a spread over an interpolated government yield.
- Typical slips: using a stale or lower-rated bond, taking the midpoint instead of the weighted point, and forgetting to double the semiannual rate.
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