A $50,000 face value STRIPS matures in 12 years and has a yield to maturity of 6.50%. What is the current dollar price of this security?
A)$21,199.68
B)$23,206.44
C)$25,038.18
D)$26,141.41
E)$28,809.18

Question

Quizplus · Accepted Answer

The current dollar price of a STRIPS (Separate Trading of Registered Interest and Principal of Securities) can be calculated using the present value formula for a single future cash flow, which is: $PV = \frac{FV}{(1 + r)^n}$, where $PV$ is the present value (current price), $FV$ is the future value (face value of the STRIPS, $50,000 in this case), $r$ is the annual yield to maturity (expressed as a decimal, so 6.50% becomes 0.065), and $n$ is the number of years until maturity (12 years). Plugging in the values, we get: $PV = \frac{50,000}{(1 + 0.065)^{12}}$, which calculates to approximately $23,206.44.

A $50,000 Face Value STRIPS Matures in 12 Years and Has