Lesson 5 of 5 · 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.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.