DEFINITION of 'Interpolation'

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.

BREAKING DOWN 'Interpolation'

Interpolation is most often used in situations where a table of values is missing data. As an example, some bond tables list net yields for bonds in a sequence of 1, 3, and 5 years. Interpolation would be used to determine the yield for the 2nd and 4th year. In effect, interpolation is a process of trial and error.

Also called linear interpolation.

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