FI - R18 Overview of Fixed Income Portfolio Management

Question 1

Matrix Pricing

Answer 1

Matrix Pricing uses the recent transaction prices of comparable bonds to estimate the market discount rate or required rate of return o less frequently traded bonds. The comparable bonds have similar features such as credit quality, time to maturity, and coupon rate to the illiquid bond. A benefit of matrix pricing is that it does not require sophisticated financial modelling of bond market characteristics such as term structure and credit spreads. A disadvantage is that some value-relevant features between different bonds (i.e. call feature) may be ignored.