What is price of Treasury Strips with a face value of $10,000 that matures in 6.5...

What is price of Treasury Strips with a face value of $10,000 that matures in 6.5 years with a yield to maturity of 4.3%? How much does the price change if the yield to maturity is only 3.2%?

What is the yield to maturity if the price of the Strips is $7,849? How much would the price be if this YTM was applied to a 8.5 year maturity instead of 6.5?

Solutions

Expert Solution

Answer a.

Face Value = $10,000

Annual YTM = 4.30%
Semiannual YTM = 2.15%

Time to Maturity = 6.50 years
Semiannual Period = 13

Price of Treasury STRIPS = $10,000 / 1.0215^13
Price of Treasury STRIPS = $7,584.05

Answer b.

Face Value = $10,000

Annual YTM = 3.20%
Semiannual YTM = 1.60%

Time to Maturity = 6.50 years
Semiannual Period = 13

Price of Treasury STRIPS = $10,000 / 1.0160^13
Price of Treasury STRIPS = $8,135.45

Change in Price = ($8,135.45 - $7,584.05) / $7,584.05
Change in Price = 0.0727 or 7.27%

Answer c.

Face Value = $10,000
Current Price = $7,849
Semiannual Period = 13

Let Semiannual YTM be i%

$7,849 = $10,000 / (1 + i)^13
(1 + i)^13 = 1.274048
1 + i = 1.0188
i = 0.0188 or 1.88%

Semiannual YTM = 1.88%
Annual YTM = 2 * 1.88%
Annual YTM = 3.76%

Answer d.

Face Value = $10,000

Annual YTM = 4.30%
Semiannual YTM = 2.15%

Time to Maturity = 8.50 years
Semiannual Period = 17

Price of Treasury STRIPS = $10,000 / 1.0215^17
Price of Treasury STRIPS = $6,965.43

jeff jeffy answered 1 year ago

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