Pricing illiquid bonds

How would you estimate a price of illiquid bond?

Lets assume that it is fixed coupon bond and bid/ask does not reflect the “correct” price as it is currently not being traded.

Also quoting the last known price is not an option.

It would matter to know why its illiquid (super private, very long term maturity (i.e. 40+ year tenor, emerging market).

But you can price it using comparables.

Key Steps:

  1. use the price that you bought the bond at and derive its yield spread from benchmark (ie. treasuries). This is the total yield spread, which has a lack of liquidity component in it.

  2. find a LIQUID comparable bond to your purchased bond (similar industr, rating, etc.) and derive the spread from benchmark. This is the yield spread without iliquidity premium.

  3. Do 1) minus 2) and you have your liquidity spread.

  4. Do Spread calc on 2) - which fluctuates daily because that bond is liquid and add the liquidity premium you calculated in 3) and Congrats you have your implied yield for that illiquid bond and the spread portion that does not account for illiquidity will be fluctuating daily.

This yield can be used to price your bond Benchmark + Comp spread + liquidity spread

dont ask carl icahn. u wont like the answer

I’d go to a couple of brokers and ask them to give you a bid. Depending on how big the issuance is, there may already be a sizeable grey market.