dreampak

Illiquidity premiums on debt instruments are generally pretty low. Save yourself the trouble and just add 25 bp and call it a day.

kickthatcfa

It actually is uncomplicated.

How long is your holding period until a buyer materializes? Let's say 3 years

Strike $1
Price $1 (i.e. parity)
Volatility 5 percent (i.e. trading levels vs. par)
Holding Period 3 years
Dividend interest payments (i.e. interest rate)

Oila. Cost of put = illiquidity premium.

Finnerty and asian put models are more complex but also address some nuances.

kingstongal

dude, I said uncomplicated!

Basically I have a credit rating for a loan and interest rate price based on that. Now because its not traded anywhere and would be tough to trade anywhere, I want to determine an appropriate illiquidity premium?

Any advice

krause2

protective put
asian put
finnerty

I would use a volatility input for comparable instruments in the public markets - i.e. corporate/high yield issuances.