Question

Euro-Canadian dollars

____

A)        Are time deposits with fixed maturities leading to illiquidity

B)        Offer the borrower a lower interest rate than can be received in the domestic market

C)        Both (A) and (B)

D)        Neither (A) nor (B)

What is the value of a Treasury STRIP that promises to pay $100,000 in exactly five years, if the appropriate rate of interest to use in discounting the STRIP’s cash flow is 6%, compounded semi-annually?

____

1. $100,000
2. $134,392

C)        $74,409

D)        $6,000

Answer 1

Answer-

The correct Option is D. Neither (A) nor (B).

Euro- Canadian dollars are not time deposits with fixed maturities
Euro- Canadian dollars do not offer borrowers a lower interest rate.

Answer-

Future Value = FV = $100000
Interest rate = 6 % annually = I/Y = 6 % / 2 = 3 % semianually
Number of periods = N = 2 x 5 = 10 [ 5 years, 5 x 2 = 10 semi annuals periods ]
Payments or Installments = PMT = $ 0

Present Value = PV = ?

By substituting the values in financial calculator we get

Present Value = PV = $ 74409.39

Therefore Present value of a Treasury STRIP = $ 74409. Option C is correct.