Before revision: We deduce a simple closed formula for illiquid corporate coupon bond prices when liquid bonds with similar characteristics (e.g. maturity) are present in the market for the same issuer. The key model parameter is the time-to-liquidate a position, i.e. the time that an experienced bond trader takes to liquidate a given position on a corporate coupon bond. The option approach we propose for pricing bonds' illiquidity is reminiscent of the celebrated work of Longstaff (1995) on the non-marketability of some non-dividend-paying shares in IPOs.
After revision: We propose an option approach for pricing bond illiquidity that is reminiscent of the celebrated work of Longstaff (1995) on the non-marketability of some non-dividend-paying shares in IPOs.