Answer: 0.0136
Explanation:
The following information can be gotten from the question:
Current price = $96
Par Value = $100
Time to Maturity = 3 years
Semiannual Period = 3 × 2 = 6
The yield to maturity of this STRIP will be calculated as:
Let the semiannually yield to maturity be represented by y.
96 = 100/(1 + y)^6
Cross multiply
96(1+y)^6 = 100
Divide both side by 96
(1+y)^6 = 100/96
(1+y)^6 = 1.0417
1 + y^6 = 1.0417
y^6 = 1.0417 - 1
y^6 = 0.0417
y = 0.0068
Therefore, the semiannual YTM = 0.0068
Annual YTM will now be:
= 2 × Semiannual YTM
= 2 × 0.068
Annual YTM = 0.0136
