


Question ID: 1211840
Cathy Moran, CFA, is estimating a value for an infrequently traded bond with six years to maturity, an annual coupon of 7%, and a singleB credit rating. Moran obtains yieldstomaturity for more liquid bonds with the same credit rating:
The infrequently traded bond is most likely trading at:
A) par value.
B) a discount to par value.
C) a premium to par value.
Using linear interpolation, the yield on a bond with six years to maturity should be 6.40% + (1 / 3)(7.20% – 6.40%) = 6.67%. A bond with a 7% coupon and a yield of 6.67% is at a premium to par value.
Answers
Hi @pcunniff , for the comparable bonds, one is 5 years to maturity, and the other is 8 years to maturity. So that's 3 years difference.
Given that the illiquid bond we are trying to compare is 6 years to maturity (1 year extra from 5 years to maturity), that's where you get 1/3.
Does this make sense?