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Linear Interpolation - Where do you get 1/3 from in explanation?

pcunniffpcunniff MilwaukeePosts: 18 Associate

Question #3 of 3

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 single-B credit rating. Moran obtains yields-to-maturity for more liquid bonds with the same credit rating:

  • 5% coupon, eight years to maturity, yielding 7.20%.
  • 6.5% coupon, five years to maturity, yielding 6.40%.

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.

(LOS 44.e)

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