The fair value of a BB-rated bond

An analyst wishes to determine the fair value of a BB-rated bond that is not publicly traded. The $1000 par bond has 3 years to maturity, and annual coupon of 7%. The analyst has found 2 comparable BB-rated bonds to perform a matrix pricing to determine the bond’s value. Comparable Bond A (5 years to maturity, YIELD-TO-MATURITY 8.7%) Comparable Bond B (2 years to maturity, YIELD-TO-MATURITY 7.4%) Use the interpolation method to determine a fair value for the bond.

Sample Solution

Interpolated Yield-to-Maturity = 7.9%
Fair Value of the Bond = $997.71

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