Interpolation

Reviewed by Komal | Updated on Sep 30, 2020

Introduction

Interpolation is a method of estimating a price or yield of a security. It is a statistical method which uses the related values to estimate an unknown price or yield of a security.

Interpolation is a simple mathematical concept. One can reasonably estimate the value of the set of points that have not been calculated if there is a consistent trend across a set of data points. This is just the best estimate of the value. No interpolator can offer complete confidence in their predictions.

Understanding Interpolation

  1. There are several kinds of interpolation, including linear interpolation, polynomial interpolation, and piecewise constant interpolation.
  2. The easiest kind is a linear interpolation, where a value of security or interest rate is calculated for a point where there is no data.
  3. One should not confuse interpolation with extrapolation, where value is estimated outside the known range of data.
  4. It is a fairly simple method to estimate the values, but it lacks correctness.

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