Subject 4. Matrix Pricing

Most bonds don't trade on a daily basis. Usually only the most recent large issues have the greatest liquidity and pricing ability. There is rarely a consensus on the exact value of an individual bond.

Matrix pricing is the practice of interpolating among values for similar instruments arranged in a matrix format.

  • It attempts to categorize bonds with similar features (e.g., type of issuer, credit rating, coupon, maturity, etc.) and apply a general yield level to the entire category of bonds. Typically a required yield over the benchmark rate is estimated.
  • It then calculates the approximate price of a specific bond within a category using the derived yield level.
  • It represents an educated guess and not an actual offer or trade price.

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