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Valuation of illiquid Bonds

Joined
4/13/15
Messages
3
Points
11
Hi All,

I am currently encountering a mathematical issue at work. It may sound very easy to some with quants background but here it is:

I must research and develop ways to broadly price (50bps accuracy) 50 North-American private corporate bonds that are somewhat illiquid (priced about 2-3 times a week).

Here’s my failed attempt:I tried to use the yield change of the bond’s benchmark & the duration of the private bond to estimate the period price change and add to the previous value to get an estimated price.

My issue is that a typical yield change of a benchmark is not at all similar to that of a private bond and so I would need to put something that makes sense in my calculation so that it converts the benchmark yield to the probable yield change of the actual security. Then, using that estimated period yield change, the duration & convexity of the private bond, estimate the price the bond (?)

Would some sort of a matrix pricing be a good idea? I pulled of a credit ? sector spread matrix but it only adds to the benchmark, it does not seem to compensate for the larger yield change that risker bonds seem to have when its benchmark moves.

Lastly, I have MAX 50bps threshold for price accuracy – although I really welcome your input even if you are not sure if your method would meet that criterion.

Thanks a lot for your input!
 
Do you have credit ratings for the bonds? If so, you know the duration of the bond so you can compute pnl changes based on changes in LIBOR, and then if you have a credit rating I'd think you could use something like Bloomberg credit spread curves or something to come up with a proxy for what the credit spread should be... at that point the only component left in the discount rate is illiquidity premium which shouldn't change too much too frequently, so based in changes in LIBOR and changes in credit spreads, you should be able to estimate pnl changes.
 
You can at best only get a range for the price as opposed to an exact price if the asset is illiquid. You can use a lattice FED computational approach based on short rate or libor rate market models calibrated to recent market data of the illiquid asset.
 
You can at best only get a range for the price as opposed to an exact price if the asset is illiquid. You can use a lattice FED computational approach based on short rate or libor rate market models calibrated to recent market data of the illiquid asset.

Thanks Moretodo,

Do you have an example of such model? I can hardly find anything that is finance related !
 
Does it even make sense to value illiquid assets especially in some non democratic country? lol
 
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