Assume that the market for Government securities in a country is not very liquid, making price discovery fairly difficult.
Also, assume that I’m purchasing a bond, which has an original tenor of 6 years, and there are 364 days remaining to maturity (at the time that I purchase this bond from the secondary market).
Therefore, in order to check whether I’m getting a good deal on the purchase of this bond from the secondary market, would it be appropriate to compare the yield of the purchased bond with the coupon rate of 364-day Treasury Bills which were issued yesterday?
Thanks a ton for your help in advance.
If the two issues are from different countries, it is not comparable.
Assuming the bond you are purchasing is zero coupon and you have an opinion between the appropriate spread between the Treasuries and your bond, you could use the Treasury bills yield to help build the appropriate discount rate.
However, if you don’t have an opinion on the spread, like MrSmart said there’s no way to compare the two.
Might be appropriate. The concern about liquidity is more relevant for a longer tenor. but since yours is only a 1 year maturity it should not be a problem to compare it with the most recent issue’s yield of the same country.
Thanks for the replies! Actually, the bond that I’m purchasing is also issued by the Government in the same country so, from your replies, would it be correct to assume that the comparison that I’ve mentioned in the first post is valid?
If both bonds have identical cashflows (or duration for different face values), then yes they should be almost the same, unless liquidity is tight on the secondary market, in which case, you should get a better deal than the primary market.