Question

The January 1, 2005, yield on a Treasury STRIP maturing in 8 years is 5.488%. If the face value is $1,000, what should be the quoted cost of the STRIP today, assuming annual compounding?

Answer 1

Answer:

$652.19

Explanation:

the market price = $1,000 / (1 + 0.05488)⁸ = $1,000 / 1.53329 = $652.19

In order to calculate the price of the STRIP we have to use the present value formula.

present value = future value / (1 + i)ⁿ

future value is the face value = $1,000

i = 5.488%

n = 8