A Treasury STRIPS matures in 9 years and has a yield to maturity of 4.9 percent.

Question

A Treasury STRIPS matures in 9 years and has a yield to maturity of 4.9 percent. Assume the par value is $100,000.

What is the price of the STRIPS? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

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

What is the price of the STRIPS? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Part a)

There are no coupon payments on STRIPS (as they are zero coupon bonds) and therefore, there is only 1 cash flow on account of face value occuring at the the maturity. The price of strips bond can be calculated with the use of following formula:

Price of STRIPS = Face Value/(1+YTM/2)^(n*2) where YTM is Yield to Maturity and n is the maturity period

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Using the values provided in the question, we get,

Price of STRIPS = (100,000)/(1+4.9%/2)^(9*2) = $64,682.18

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Part b)

The quoted price can be calculated with the use of following formula

Quoted Price = STRIPS Price/$1,000

_______________

Quoted Price = 64,682.18/1,000 = $64.682

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