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Bond Pricing (Illiquid Asset)

May 17th, 2019, 1:49 pm


Wanted to ask a question on real world pricing of a bond, specifically an Illiquid bond (e.g. a Bond that due to sanctions lets say has very limited, if any trading during the course of the month).  When it comes to Month End, we price the bond following an in-house pricing hierarchy (Bloomberg BGN, MarkIT, Reuters etc...)

However, at month end, given the month is deemed illiquid, given there are no transactions and that BGN, MarkIT, Reuters etc, do have prices BUT are stale from the previous month, I want to take a different approach to pricing this illiquid bond.  We also assume the Bond is defaulted, so traditional discounted cash flow analysis holds no weight here.  Broker quotes are only indicative so lets assume they hold little weight also.  Lets call this Bond 9.25% Kaznia 2028s

How may one, try and price this bond?  Could we use comparables (say another Kaznia bond which has traded in the month), a proxy, or any sort of model to derive a price for my Kaznia 28s? If so, could you provide a simple numerical example of how this would work?

Many Thanks and much appreciated

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Re: Bond Pricing (Illiquid Asset)

May 21st, 2019, 6:55 pm

If the bond has defaulted it must trade pari passu to any other bond of equivalent seniority (most likely senior unsecured). If you can find one price, of any bond anywhere, you’ve got the price of all of them .
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Re: Bond Pricing (Illiquid Asset)

May 21st, 2019, 11:29 pm

Not necessarily. While that would (or at least should) be true for corporate bonds subject to the US bankruptcy code, it is most definitely not the norm in sovereign defaults. 
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Re: Bond Pricing (Illiquid Asset)

May 30th, 2019, 2:24 pm

The answers provided here give you some options. Moreover, if your central assumption is a default of the underlying issuer of the bond, then what you get back is simply the recovery rate for comparable bonds with the same ( Currency, country, and rating ). If you want to take the more complex path, then I am assuming that this bond is in your trading book which means that it is subject to an own fund requirement for migration and outright default risk, and falls under the jurisdiction of the Incremental Risk Charge(IRC Pre-FRTB), then you need to create rate scaling factors derived from the price of the bond prior to default derived from the associated (Currency, Rating, country-specific curve), the cash flows of the non-risky bond using the specific curve, and set it equal to the market price and get the uniform scaling factor that will match the market price . Apply this scaling factor to the Default curve(Rating D), with the corresponding (Rating, Currency, country ) and reprice after default.  Read about the Incremental Risk Charge (soon to be replaced with Default Risk charge-FRTB) 

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