What is 'Interpolation'
Interpolation is a statistical method by which related known values are used to estimate an unknown price or potential yield of a security. Â
BREAKING DOWN 'Interpolation'
Interpolation is a method of estimating an unknown price or yield of a security. This is achieved by using other related known values that are located in sequence with the unknown value.
Interpolation is at root a simple mathematical concept. If there is a generally consistent trend across a set of data points, one can reasonably estimate the value of the set at points that hasn't been calculated. However, this is at best an estimate; interpolators can never offer complete confidence in their predictions.
Different Kinds of Interpolation
There are several formal kinds of interpolation, including linear interpolation, polynomial interpolation and piecewise constant interpolation.
The easiest and most prevalent kind is linear interpolation, which is useful if one is trying to estimate the value of a security or interest rate for a point at which there is no data. Let's assume that, for a security price being tracked over a period of time, we call the line on which the value of the security is tracked the function f(x). The current price of a stock is plotted over a series of points representing moments in time. So if f(x) is recorded for the months of August, October and December, those points would be mathematically represented as x_{Aug,Â }x_{Oct,Â }and x_{Dec,Â }or x_{1,Â }x_{3 }andÂ x_{5. Â }
For a number of reasons, one might want to know the value of the security during the month of September. You can use a linear interpolation algorithms to determine the value of f(x) at plot point x_{Sep}, or x_{2}Â that appears within the existing data range.
Interpolation should not be confused with extrapolation, by which one could estimate a data point outside of the known range of data. Most charts representing a stock's history are in fact widely interpolated. Linear regression is used to make the curves which approximately represent the price variations of a security. Even if a chart measuring a stock over a year included data points for every day of the year, one could never say with complete confidence where a stock will have been valued at a specific moment in time. Â
Interpolation is fairly simple, but it lacks precision. Interpolation has been used by human civilizations since antiquity, particularly by early astronomers in Mesopotamia and Asia Minor attempting to fill in gaps (the observation possibilities for astronomers being inherently limited). While the movement of planetary bodies is subject to many factors, they are still better suited to the imprecision of interpolation than the wildly variant, unpredictable fluctuations of publiclytraded stocks. Nevertheless, with the overwhelming mass of data involved in securities analysis, large interpolations of price movements are fairly unavoidable.
Â
Â

Maturity
The period of time for which a financial instrument remains outstanding. ... 
Yield To Maturity (YTM)
The total return anticipated on a bond if the bond is held until ... 
Bond
A debt investment in which an investor loans money to an entity ... 
Bootstrapping
1. A procedure used to calculate the zerocoupon yield curve ... 
Yield
The income return on an investment. This refers to the interest ... 
Kurtosis
A statistical measure used to describe the distribution of observed ...

Savings
The Difference Between Compounding Interest and Simple Interest
Interest is the cost a borrower pays to use someone elseâ€™s money. Interest can be either simple or compounded. 
Investing News
AQR Capital Management: Investment Manager Highlight
Discover the investment strategies and secrets of hedge fund powerhouse AQR Capital Management LLC in the alternative investment space. 
Economics
Understanding Game Theory
Game theory is a model for making decisions that weighs the benefits of a choice along with the interaction between participants. 
Economics
Understanding Imperfect Competition
Imperfect competition appears in several different forms. Markets are evaluated by how they compare to, and try to approach, perfect competition. 
Investing News
Performance Review  U.S. Fixed Income in 2015
Review the performance of the U.S. fixedincome securities in 2015, from the relatively strong U.S. municipal bond market to the calamitous highyield space. 
Bonds & Fixed Income
Do LongTerm Bonds Have A Greater Interest Rate Risk Than ShortTerm Bonds?
The answer is yes, and there are two main reasons why. 
Bonds & Fixed Income
Comparing Yield To Maturity And The Coupon Rate
Investors base investing decisions and strategies on yield to maturity more so than coupon rates. 
Investing
What Happens to Bond ETFs in Stressed Markets?
We are going to dive a little deeper today at how bond exchange traded funds (ETFs) fare when the markets are stressed. 
Investing News
Natixis Global Asset Management: Investment Manager Highlight (NTXFY)
Read about the investment operations of Natixis Global Asset Management, a multiaffiliate manager with $870 billion in worldwide assets under management. 
Investing News
Mesirow Financial: Investment Manager Highlight
Read about the investment management operations of Mesirow Financial, an employeeowned financial services firm with $96.8 billion in assets under management.

Besides a savings account, where is the safest place to keep my money?
Savings accounts are safe because investors' deposits are guaranteed by the Federal Deposit Insurance Corporation (FDIC) ... Read Answer >> 
What is finance?
"Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Answer >> 
What is the difference between positive and normative economics?
Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Answer >> 
What are the maximum Social Security disability benefits?
Find out the maximum Social Security disability benefits for qualifying individuals and couples in 2015, including who is ... Read Answer >> 
How do I calculate the future value of an annuity?
Find out how to calculate the future value of an ordinary annuity or an annuity due, including how the power of compounding ... Read Answer >> 
Have hedge funds eroded market opportunities?
Learn why there is still plenty of opportunity for investors even though hedge funds have grown substantially. Read about ... Read Answer >>