Question

A Treasury STRIPS matures in 20 years and has a yield to maturity of 8.4 percent....

A Treasury STRIPS matures in 20 years and has a yield to maturity of 8.4 percent. Assume the par value is $100,000.

a. What is the price of the STRIPS? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the quoted price? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

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Answer #1

Treasury STRIPS are calculated on basis of semi-annual compounding of yield

FV = Par value =

$100,000

R = Rate = Required rate of return = Yield semi-annual = Yield / 2 = 8.4%/2 =

4.20%

N = Number semi-annual period till maturity = 20 years x 2 = 40 =

40

Price of STRIPS = FV / (1+R)^N

Price of the STRIPS = 100000/(1+4.2%)^40

$19,288.18

Quoted price = (Price of STRIPS / FV) x 100 = (19288.18/100000 x 100) =

19.288
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