CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields
An analyst uses matrix pricing to estimate the yield on an unquoted 7-year bond. Comparable bonds with the same credit quality and coupon structure yield 3.00% at 5 years and 4.50% at 10 years. Using linear interpolation, the required yield for the 7-year bond is closest to:
The estimated yield is about 3.60%. Seven years lies two-fifths of the way between the 5-year and 10-year comparables, so add two-fifths of the 1.50% yield gap to 3.00%. The simple midpoint of 3.75% ignores where the maturity sits.
- A3.30%
- B3.60%Correct
- C3.75%
Explanation
The 7-year point is 2/5 of the way from 5 to 10 years. The yield is 3.00% + (2/5) × 1.50% = 3.60%. The 3.75% answer is the simple midpoint of the two yields, which ignores the maturity position. The 3.30% answer uses 2/10 instead of 2/5 as the weight, which is the wrong base.
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