Fixed income pricing a Corporate Bond using yield spreads and matrix/interpolation.
You really don’t need the numbers for this, but here it is anyways
If you have a
5 year US T-bond, YTM = 1.48%
5 year A rated Cpt bond, TYM = 2.64%
7 year US T-bond, YTM = 2.15%
7 year A rated Cpt bond, TYM = 3.55%
6 year US T-bond, YTM = 1.74%
and you want to find the required yield on a newly issued 6 year A rated corporate bond.
MY QUESTION: I was wondering why you HAD to use the yield spread method (getting the spread for each the 5 year and 7 year maturity and then interpolating the SPREAD and adding it to the 6 year US t-bond YTM)?
What would be the problem in interpolating the Corporate Bonds directly (ie averaging them out) to get the YTM straight away? For now, I seem to fail to see the flaw in logic of this method.